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AN    ANALYSIS    AND 
INTERPRETATION 

OF 

THE    FEDERAL 
INCOME   TAX    LAW 


AN  ANALYSIS  AND 
INTERPRETATION 


OF  THE 


Federal  Income  Tax  Law 


BY 


Hon.  HENRY  M.  FOOTE 

(Late  Asnitant  to  the  Attorney  General  of  the  United  States.  Department  of  Juatice) 


AND 

Hon.  ROBERT  J.  TRAGEWELL 

(Late  Comptroller  of  the  United  Statet.  Treasury  Department)       t 


a^ 


1914 

W.  F.  ROBERTS  COMPANY,  PUBLISHERS 
WASHINGTON.  D.  C. 


COPYRIGHT  1914 
W.  F.  ROBERTS  COMPANY 


INDEX 


ADDITIONAL  TAX 

Levied  upon  net  income  in  excess  of  $20,000 8 

Income  included  and  excluded  in.  making  return  for 8-9 

Not  assessed  on  income  in  trustee  or  debtor's  hands 12 

COLLECTION  OF  NORMAL  TAX  ONLY  AT  THE  SOURCE. 

Interest  on  corporate  indebtedness   14 

Who  required  to  withhold  tax 12 

Banks  and  other  required  to  withhold  tax 14 

Instructions  to  banks  collecting  coupons,  etc 15-16 

Deductions  from  income  taxed  at  source,  how  obtained 12 

Trustee  or  debtor  to  make  return  13 

Trustee  or  debtor  to  make  return  for  one  disqualified  or  unable 

to  make  it  14 

Trustee  or  debtor  not  to  withhold  tax  after  claim  for  exemption 

under  par.  C  is  filed 12 

Trustee  or  debtor  will  withhold  and  pay  tax  from  fixed,  deter- 
minable, annual  gains  and  profits,  in  excess  of  $3,000 12 

License  to  be  obtained  to  make  collection  of  foreign  payments  of 

interest    and    dividends    IS 

Normal  tax  withheld  only  after  November  1st,  1913 12 

CORPORATIONS. 

Pay  normal  tax  only  on  net  income 17 

Foreign  corporations  pay  on  business  and  capital  invested  in  the 

United  States   17 

Return   of   on   or   before    March    1st,    or   60   days    after   time 

designated   17 

Gross  income  of   18 

Income  excluded  in  making  return 18-19 

Deductions  to  be  made  from  gross  income  in  return 19-20 

Foreign  corporations — deductions  from  gross  income  on  business 

and  capital  invested  in  the  United  States 20-21 

Tax  only  for  January  and  February,  1913 22 

Commissioner  Internal  Revenue  will  assess  tax 23 

Tax  payable  on  or  before  June  30th  on  return  of  March  1st..  23 

Tax  payable  120  days  after  return  of  day  designated 23 

DIVIDENDS  OF  CORPORATIONS. 
Not  subject  to  normal  tax  in  hands  of  individual,  trustee  or 

debtor    9 

Subject  to  tax  as  income  of  corporations 18 

Subject  to  additional  tax  in  hands  of  individual  if  net  income 

exceeds  $20,000    9 

Dividends  of  foreign  corporations  subject  to  tax 18 


INDEX-Gontinued 


EXEMPTION  AND  DEDUCTIONS. 

How  claimed  by  individual  in  return  11 

How  claimed  to  trustee  or  debtor  12 

FIDUCIARY  AGENTS. 

Must  make  return  and  pay  tax  for  one  they  represent 11 

One  of  two  or  more  may  make  return 11 

INCOME. 

Gross  of  individuals   7-8 

Gross  income  of  corporations 19 

Exemption  and   deductions   from  gross  income  in  ascertaining 

net  income 8-19 

Net  income  subject  to  tax  9-20 

Only  income  derived  from  fixed,  determinable,  annual  gains  and 

profits  in  excess  of  $3,000  taxable  in  hands  of  trustee  or 

debtor   12 

Income  from  interest  obligations  of  corporations  subject  to  tax 

if  less  than  $3,000   14 

Annual  income  taxable  in  hands  of  individual  8 

PENALTIES  24 

RETURN. 

Of  corporations  17 

How  made  by  corporations  18 

When  made  17 

How   verified    18 

Domestic  corporations,  tax  on 17 

Foreign  corporations,  tax  on  17 

Return  by  individuals   10 

Exclusions  in  making  return   8 

Deductions  in  making  return    9 

Return  may  be  increased  by  collector  6 

Appeal  from  collector  to  Commissioner  of  Internal  Revenue . .  10 

No  return  unless  income  exceeds  $3,000  for  calendar  year 10-25 

Return  should  be  made  if  individual  claims  the  benefit  of  de- 
ductions and  exemption   10 

TAX. 

Normal  tax  on  individuals   7 

Additional  tax  on  net  income  in  excess  of  $20,000 8 

Trustee  or  debtor  pays  only  normal  tax  12 

Corporations  pay  only  normal  tax  17 

On  net  income  of  individuals  in  excess  of  $3,000,  although  not 
from    fixed,    determinable,    annual    income    as    is    required 

when  tax  is  withheld  at  the  source  by  trustee  or  debtor...  7-10 

6 


Our  purpose  in  presenting  this  analysis  of  the  Federal 
Income  Tax  law  is  to  make  it  as  comprehensive  as  possible 
without  entering  too  fully  into  a  discussion  of  its  provisions. 
What  the  public  particularly  desires  to  know  is  the  scope 
of  the  law  and  how  to  comply  with  its  requirements.  We 
have  appended  hereto  a  copy  of  the  Act  and  also  important 
Treasury  Regulations  and  forms  under  it.  In  this  discus- 
sion reference  will  be  made  to  the  law  by  paragraphs  and 
subdivisions  of  paragraphs. 

The  legislation  which  we  are  considering  is  section  2  of 
the  Tariff  Act  approved  October  3,  1913.  Subdivision  1 
of  paragraph  A  imposes  a  normal  tax  of  one  per  centum 
per  annum  upon  the  entire  net  income  arising  or  accruing 
from  all  sources  in  the  preceding  calendar  year  to  the  in- 
dividuals named.  It  also  provides  that  said  tax  shall  be 
levied,  collected  and  paid  annually  upon  the  entire  net  in- 
come from  all  property  owned  and  of  every  business,  trade 
or  profession  carried  on  in  the  United  States  by  persons 
residing  elsewhere. 

Paragraph  B  defines  the  sources  of  taxable  income.  In 
addition  thereto  other  income  is  subject  to  the  tax  as 
follows : 

a — The  share  of  the  profits  of  a  partnership  to 
which  any  taxable  partner  would  be  entitled 
if  the  same  were  divided,  whether  divided  or 
not. 


ANALYSIS  AND   INTERPRETATION    OF 

b — Income  derived  from  property  acquired  by 
gift,  bequest,  devise  or  descent. 

c — Income  received  as  salary  by  any  official  of 
the  United  States  (except  the  President  and 
judges  in  office  March  first  1913)  the  govern- 
ments of  the  District  of  Columbia,  Porto 
Rico,  and  the  Philippine  Islands,  or  the  politi- 
cal subdivisions  thereof. 

d — Income  which  may  arise  or  accrue  within  the 
preceding  calendar  year  from  any  source  not 
particularly  mentioned. 

A  tax  known  and  designated  as  an  additional  tax  is  im- 
posed upon  the  income  of  the  individuals  named  whenever 
their  net  income  exceeds  $20,000.  This  tax  is  assessed 
under  the  provisions  of  subdivision  2  of  paragraph  A. 

Taxable  income  consists  of  money,  property,  debts  re- 
ceivable, or  anything  else  which  has  an  ascertainable  value, 
received  as  gains,  profits  and  income  from  either  of  the 
sources  hereinbefore  referred  to  during  the  taxable  year. 
A  debt  receivable  which  does  not  represent  income  derived 
from  any  of  said  sources  is  not  taxable. 

In  making  a  return  of  net  income  subject  to  the  tax  the 
individual  will  exclude  for  the  purpose  of  both  the  normal 
and  additional  tax  that  which  has  been  received  as  follows : 

a — The  proceeds  of  life  insurance  policies  paid 
upon  the  death  of  the  person  insured,  or  pay- 
ments made  by  or  credited  to  the  insured  on 
life  insurance  endowment  or  annuity  contracts 
upon  the  return  thereof  to  the  insured  at  ma- 
turity of  the  term  mentioned  in  the  contract. 

b — The  value  of  property  acquired  by  gift,  be- 
quest, devise  or  descent. 

c — The  interest  upon  the  obligations  of  a  State  or  any 
political  subdivision  thereof;  the  United  States  or 
its  possessions,  or  of  the  District  of  Columbia. 
Also  the  compensation  of  the  President  and  others 
enumerated  in  the  3d  subdivision  of  paragraph  B. 

8 


THE     FEDERAL     INCOME     TAX     LAW 

The  income  received  during  the  taxable  year  from  the 
following  sources  is  exempt  from  the  normal  tax  but  must 
be  included  in  the  individual's  return  for  the  purposes  of 
the  additional  tax : 

a — The  dividends  on  the  capital  stock  or  from  the  net 
earnings  of  corporations  and  others  enumerated  in 
paragraph  G,  who  pay  the  normal  tax  upon  net 
income. 

b — The  income  upon  which  the  normal  tax  has  been 
withheld  and  paid  or  to  be  paid  under  provisions  of 
paragraphs  D  and  E,  referred  to  in  subdivision  2 
of  paragraph  B. 

Subject  to  the  aforesaid  exclusions  the  individual  will 
make  such  deductions  from  his  gross  income  as  are  appli- 
cable, as  stated  in  subdivision  2  of  paragraph  B.  From  net 
income  thus  ascertained  the  exemption  allowed  in  paragraph 
C,  will  be  deducted.    The  income  that  remains  is  taxable. 

Difficulty  may  arise  in  properly  determining  those  de- 
ductions which  relate  to  the  exhaustion,  wear  and  tear  of 
property  in  business,  worthless  debts,  and  local  assessments. 

The  necessary  exhaustion,  or  depreciation,  wear  and  tear 
of  property  in  carrying  on  business  will  be  determined  in 
each  case  from  the  character  and  nature  of  its  use.  A 
proper  allowance  for  the  general  depreciation  of  property 
arising  from  its  use  should  not  include  cost  of  maintenance 
etc.  A  worthless  debt  must  be  charged  off  within  the 
taxable  year  in  order  that  the  same  may  be  deducted  from 
taxable  income.  A  debt  of  this  description  is  one  that  is  not 
collectible  on  account  of  the  insolvency  of  the  debtor.  A 
local  assessment  is  one  assessed  upon  real  estate  to  cover  a 
proportionate  cost  of  a  public  improvement  which,  to  the 
extent  of  such  assessment,  enhances  the  value  of  the  tax- 
payer's property. 

It  cannot  be  doubted  that  under  the  provisions  of  para- 
graph C  taxable  income  to  the  amount  of  $3000  belonging 


ANALYSIS  AND   INTERPRETATION   OF 

to  every  person,  married  or  unmarried,  is  exempt  from  the 
tax.  No  other  reasonable  construction  can  be  given  the 
law.  Marriage  should  not  be  construed  as  a  voluntary  sur- 
render of  a  legal  right  to  the  Government  of  the  United 
States.  The  law  contemplates  that  the  husband  or  wife, 
when  living  together,  may  claim  the  benefit  of  the  additional 
exemption  of  $1000  from  the  aggregate  taxable  income  of 
both  in  excess  of  $^ooo.  No  other  construction  of  the  law 
will  square  with  reason  and  justice. 

If  the  entire  gross  income  of  the  individual  from  the 
sources  mentioned  does  not  exceed  $3000  he  is  not  required 
to  make  a  return  of  such  income  to  the  collector  of  internal 
revenue.  If  such  income  exceeds  that  amount  he  should 
make  a  return  with  claims  for  deduction  and  exemption. 
It  may  happen  that  after  the  individual  has  made  the  de- 
ductions and  exemption,  as  stated,  from  his  gross  income 
that  no  apparent  taxable  income  will  remain,  but  he  is  not 
the  sole  judge  of  that  matter,  the  collector  will  pass  upon 
the  return  and  may  determine  otherwise,  if  he  does  the  in- 
dividual may  appeal  to  the  Commissioner  of  Internal  Rev- 
enue and  introduce  sworn  testimony. 

Under  the  provisions  of  paragraph  D,  the  individual  will 
make  a  return,  under  oath  or  affirmation,  of  his  net  income 
for  aforesaid  purposes,  to  the  collector  of  internal  revenue 
of  the  district  in  which  he,  the  taxpayer,  resides  or  has 
his  principal  place  of  business.  In  case  a  person  resides  in 
a  foreign  country  such  return  will  be  made  in  the  place 
where  his  principal  business  is  carried  on  in  the  United 
States.  In  either  case  the  return  must  be  filed  with  the 
collector  on  or  before  March  first  of  each  year.  The  return 
must  show  the  net  income  of  the  individual  for  the  year 
which  begins  on  the  1st  day  of  January  and  ends  on  the 
31st  day  of  December  following.  For  the  year  1913,  the 
net  income  will  be  computed  from  March  1st  to  December 
31st  both  dates  inclusive.     Five-sixths  only  of  the  deduc- 

10 


THE     FEDERAL     INCOME     TAX     LAW 

tions  in  paragraph  B  and  the  exemption  in  paragraph  C,  for 
the  taxable  year  of  twelve  months  will  be  deducted  from 
gross  income  for  the  ten  months  (except  that  in  the  case  of 
dividends  on  the  capital  stock  or  from  the  net  earnings  of 
corporations  which  is  made  the  7th  specific  deduction  in 
paragraph  B,  the  total  amount  thereof  should  be  deducted 
from  gross  income  for  the  purposes  of  the  normal  tax,  in- 
stead of  five-sixths  of  such  income). 

The  tax  will  be  assessed,  upon  the  net  income  so  returned 
by  the  individual,  by  the  Commissioner  of  Internal  Revenue 
unless  the  same  is  increased  by  the  collector  of  internal  rev- 
nue.  If  the  collector  should  make  the  increase  the  indi- 
vidual may  submit  the  case  to  the  Commissioner  of  Internal 
Revenue  for  review,  as  before  stated.  After  the  tax  has 
been  assessed  a  notice  will  be  sent  to  the  individual  of  the 
amount  on  or  before  the  1st  day  of  June  and  the  tax  must 
be  paid  to  the  collector  of  internal  revenue  on  or  before  the 
30th  day  of  said  month.  Under  paragraph  E  the  Com- 
missioner is  authorized  to  make  a  return  for  the  individual, 
in  case  of  his  neglect  or  refusal  so  to  do,  and  thereupon 
assess  the  tax  upon  it  with  penalty. 

Those  who  act  in  a  fiduciary  capacity,  as  stated  in  para- 
graph D,  are  required  to  make  a  return  and  pay  the  tax 
for  the  individual  they  represent.  They  are  governed  by 
the  same  provisions  of  the  law  that  relate  to  individuals  in 
making  such  return.  One  of  two  or  more  persons  acting 
in  said  capacity  is  authorized  to  make  such  return  provided 
he  files  it  in  the  district  where  such  person  resides  or  where 
the  will  or  other  instrument  is  recorded. 

The  net  income  from  property  owned  and  business  car- 
ried on  in  the  United  States  by  persons  residing  elsewhere 
shall  be  computed  upon  the  basis  prescribed  in  paragraph  B 
and  that  part  of  paragraph  G  relating  to  the  computation 
of  net  income  of  corporations  and  others  organized,  created, 

11 


ANALYSIS  AND   INTERPRETATION    OF 

or  existing  under  the  laws  of  foreign  countries  so  far  as 
applicable. 

The  normal  tax  will  be  withheld  and  paid  at  its 
source  under  the  provisions  of  paragraphs  D  and  E. 
Under  the  provisions  of  subdivision  C  of  paragraph  E 
the  additional  tax  will  not  be  assessed  on  income  in 
the  sourceholder's  hands. 

The  words  "trustee  or  debtor"  will  be  used  to  designate 
those  who  withhold  and  pay  the  normal  tax  as  enumerated 
in  said  paragraphs. 

Whenever  a  trustee  or  debtor  has  in  his  hands  income 
which  belongs  to  another  person  from  any  of  the  sources 
mentioned  in  said  paragraphs  which  has  been  received  dur- 
ing the  taxable  year  as  fixed,  determinable  annual  gains  and 
profits  in  excess  of  $3000,  exclusive  of  dividends  on  the  cap- 
ital stock  or  from  the  net  earnings  of  corporations  and 
others,  such  trustee  or  debtor  is  authorized  and  required  to 
deduct  and  withhold  the  normal  tax  upon  such  income  and 
pay  the  same  to  the  Collector  of  Internal  Revenue.  If  such 
income  is  interest  from  corporate  indebtedness  the  tax  must 
be  withheld  and  paid  although  such  income  is  less  than 
$3000.  The  tax  will  not  be  withheld  prior  to  November 
1st  1913.  Thereafter  it  will  be  withheld  on  income  for  the 
taxable  year  as  hereinbefore  stated. 

Subdivision  2  of  paragraph  E  provides  that  if  the  indi- 
vidual desires  to  claim  the  benefit  of  exemption  C,  where 
the  tax  is  withheld  and  deducted  at  the  source,  he  must, 
not  less  than  30  days  prior  to  the  1st  day  of  March  each 
year  file  with  the  trustee  or  debtor  a  signed  notice  in  writing 
claiming  such  benefit.  After  said  notice  has  been  filed  the 
trustee  or  debtor  will  no  longer  withhold  the  tax  upon  the 
amount  claimed  by  such  exemption.  Notice  of  an  intention 
to  claim  the  benefit  of  the  deductions  in  paragraph  B  must 
be  filed  in  the  same  manner.     In  addition  to  such  notice, 

12 


THE     FEDERAL     INCOME     TAX     LAW 

however,  the  individual  must  file  at  the  same  time  a  true  and 
correct  return  of  his  annual  gains,  profits  and  income  from 
all  sources  with  the  trustee  or  debtor  and  the  showing  thus 
made  will  then  become  a  part  of  the  return  to  be  made  in 
behalf  of  the  individual  by  the  trustee  or  debtor  on  or 
before  March  1st.  Instead  of  fiHng  the  return  in  this 
manner  the  individual  may  file  it  directly  with  the  collector 
of  internal  revenue  for  the  district  in  which  return  is  made 
or  to  be  made  for  him  under  the  same  conditions  as  in 
other  cases  of  personal  return. 

Concerning  the  time  when  the  claim  for  exemption  under 
paragraph  C  may  be  filed  with  the  trustee  or  debtor  there 
can  be  no  doubt,  as  the  exemption  is  a  personal  privilege 
it  may  be  claimed  at  any  time  within  the  limitation  stated. 
As  to  the  earliest  time  when  a  claim  for  an  allowance  for 
the  deductions  in  paragraph  B  may  be  made  the  law  is  not 
clear. 

As  the  exemption  and  deductions  are  beneficial  provisions 
it  is  believed  that  the  purpose  of  their  allowance,  in  the 
manner  stated  in  said  subdivision  2  of  paragraph  E,  is  to 
enable  the  individual  to  obtain  payment  of  income  in  the 
hands  of  his  trustee  or  debtor  upon  which  tax  is  withheld 
as  speedily  as  possible  by  permitting  him  to  file  with  such 
trustee  or  debtor  partial  returns  of  net  income,  with  claim 
for  deductions,  at  any  time  before  the  expiration  of  the 
time  mentioned,  which  return  will  relieve  the  trustee  or 
debtor  from  further  liability  of  withholding  and  paying 
the  tax,  to  the  Government,  on  income  to  the  amount  of 
deductions  claimed  in  such  partial  returns.  No  treasury 
regulation  has  been  issued  relating  to  this  subject,  but 
without  doubt  one  will  be  promulgated  at  an  early  day. 

In  case  the  individual  fails  to  file  a  claim  for  the  benefit 
of  the  exemption  in  paragraph  C  and  the  deductions  in 
paragraph  B  with  the  trustee  or  debtor  within  the  time 

13 


ANALYSIS  AND   INTERPRETATION    OF 

stated  he  must  make  application  for  a  refund  of  the  tax, 
provided  his  entire  income  is  in  the  hands  of  such  trustee 
or  debtor.  If,  however,  he  has  other  taxable  income  such 
claim  for  exemption  and  deductions  will  be  considered  in 
reference  thereto. 

The  trustee  or  debtor  is  authorized  to  make  a  return  for 
one  who  is  disqualified  from  doing  so  on  account  of  minor- 
ity, insanity,  illness  or  absence  from  the  United  States.  One 
for  whom  a  return  has  been  made  and  the  tax  paid,  or  to 
be  paid,  is  not  required  to  make  a  return  unless  he  has  other 
taxable  income;  but  only  one  deduction  of  $3000  shall  be 
made  in  the  case  of  such  person.  Notwithstanding  income 
in  the  hands  of  a  trustee  or  debtor  may  not  be  taxable,  still 
if  it  has  been  received  from  any  of  the  sources  mentioned 
in  paragraph  B,  it  may  be  taxable  after  the  same  has  been 
paid  to  the  individual. 

Under  subdivision  2  of  Paragraph  E  the  trustee  or 
debtor  will  withhold  and  pay  the  tax  on  interest  and 
dividend  income  from  corporate  indebtedness  although 
the  same  is  less  than  $3000. 

The  provisions  of  this  paragraph  relate  to  the  fixed,  and 
determinable  annual  gains,  profits  and  income  derived  from 
interest  upon  the  obligations  of  domestic  corporations,  joint- 
stock  companies  or  associations  and  insurance  companies, 
whether  payable  annually  or  at  longer  or  shorter  periods, 
although  such  sum  does  not  amount  to  $3000,  subject,  how- 
ever, to  the  provisions  of  the  law  requiring  the  normal  tax 
to  be  withheld  at  its  source  and  deducted  from  the  annual 
net  income  of  the  individual  and  paid  to  the  Government. 

The  normal  tax  will  be  deducted  and  withheld  by  such 
trustee  or  debtor  from  coupons,  checks,  or  bills  of  exchange 
for  or  in  payment  of  interest  upon  bonds  of  foreign 
countries,  and  upon  foreign  mortgages  and  like  obligations 
(not  payable  in  the  United  States).     The  tax  will  also  be 

14 


THE     FEDERAL     INCOME     TAX     LAW 

deducted  and  withheld  from  coupons  etc.  for  or  in  pay- 
ment of  dividends  upon  the  stock  or  interest  upon  the 
obhgations  of  foreign  corporations,  associations  and  insur- 
ance companies  engaged  in  business  in  foreign  countries, 
although  such  interest  or  dividend  does  not  exceed  $3000: 
provided  that  in  each  case  the  person  to  whom  such  in- 
terest or  dividend  is  payable  is  subject  to  the  tax  under  the 
provisions  of  Paragraph  A. 

These  provisions  which  require  the  tax  to  be  withheld 
from  coupons  etc.  drawn  and  payable  for  such  interest  and 
dividends  (not  made  payable  in  the  United  States)  relate 
to  a  bank,  or  person  who  shall  sell  or  otherwise  realize  or 
obtain  the  money  in  payment  of  such  coupons  etc.  They 
also  apply  to  any  person  (not  in  the  United  States)  who 
shall  obtain  payment  of  such  interest  or  dividend  in  behalf 
of  a  person  subject  to  the  tax  thereon;  and  also  to  any 
dealer  in  such  coupons  who  shall  purchase  the  same  for  any 
such  interest  or  dividend  (not  payable  in  the  United  States) 
otherwise  than  from  a  licensed  banker  of  another  dealer  in 
such  coupons.  It  will  be  observed  that  the  last  clause  of  this 
subdivision  of  paragraph  E  extends  the  benefit  of  the  de- 
ductions and  exemption  in  paragraphs  B  and  C  to  the  in- 
dividual subject  to  the  tax.  Before  a  bank,  corporation, 
or  person  can  undertake  as  a  matter  of  business  or  profit 
the  collection  of  foreign  payments  of  interest  or  dividends 
by  means  of  coupons  etc.  a  license  will  have  to  be  obtained 
from  the  Commissioner  of  Internal  Revenue. 

When  a  coupon  or  other  evidence  of  the  interest  indebt- 
edness of  a  domestic  corporation  etc.  is  presented  to  a  bank 
or  other  collecting  agency  for  collection,  the  owner  of  such 
coupon  must  attach  thereto  a  certificate  of  ownership  with 
a  claim  for  exemption  under  paragraph  C.  The  bank  or 
collecting  agency  will  thereupon  forward  said  certificate 
with  coupon  to  the  trustee  or  debtor  who,  if  such  owner's 

15 


ANALYSIS  AND   INTERPRETATION    OF 

net  income  does  not  exceed  the  amount  of  the  exemption 
claimed,  will  remit  to  such  bank  the  amount  of  such 
coupon  in  full.  If  such  owner's  income  exceeds,  from  said 
source,  the  exemption  claimed  the  trustee  or  debtor  will 
withhold  and  pay  the  normal  tax  on  such  excess,  unless, 
under  proper  regulations  of  the  Treasury  Department,  the 
individual  may  be  allowed  the  benefit  of  deductions  in  para- 
graph B  in  the  manner  hereinbefore  pointed  out. 

The  bank  or  collecting  agency  may,  however,  attach  its 
own  certificate  to  such  coupon;  if  this  is  done  it  will  detach 
the  owner's  certificate  therefrom  and  send  the  same  direct  to 
the  Commissioner  of  Internal  Revenue.  If  a  coupon  is 
presented  for  collection  unaccompanied  by  a  certificate  of 
ownership  and  claim  for  exemption,  as  stated,  the  bank  or 
collecting  agency  to  whom  presented  will  deduct  the  normal 
tax  thereon  and  forward  to  the  trustee  or  debtor  the  cou- 
pon with  its  certificate  whereupon  the  trustee  or  debtor  will 
be  relieved  from  the  payment  of  said  tax  thereon.  In  such 
a  case  the  bank  or  collecting  agency  as  a  withholder  of  the 
tax  will  make  return  to  the  collector  of  internal  revenue. 

In  order  to  classify  income  upon  which  the  normal  tax 
is  to  be  withheld  and  paid,  and  that  upon  which  the  tax  is 
not  to  be  withheld  and  paid  we  will  state  the  same  as  follows : 

The  tax  will  be  withheld  on  income: 


a — When  the  net  income  of  the  individual  from 
fixed,  determinable  annual  gains  and  profits 
from  the  sources  mentioned  in  Paragraphs  D 
and  E,  exceeds  $3000  for  any  taxable  year  or 
such  portion  of  the  year  1913,  as  is  hereinbe- 
fore stated. 

b — When  such  income  is  for  interest  on  the 
indebtedness  of  domestic  corporations  and 
interest   and   dividends   of    foreign   corpora- 

16 


THE     FEDERAL     INCOME     TAX     LAW 

tions  mentioned  in  subdivision  2  of  Para- 
graph E,  although  the  same  is  less  than 
$3000. 

The  tax  will  not  be  withheld  on  income : 

a — When  the  income,  so  far  as  applicable,  is  of 
the  same  character  as  that  excluded  by  the  in- 
dividual in  making  his  individual  return  as 
hereinbefore  stated. 

b — When  the  income  received  is  interest  on  a  cer- 
tificate of  deposit,  or  upon  a  deposit  in  a  bank 
or  banking  institution.       (See  T.  D.  1893.) 

c — When  the  income  is  not  fixed,  determinable 
and  annual,  but  is  received  incidentally  as  a 
gain  or  profit  for  some  special  service  or  trans- 
action. 

d — When  the  net  income  (except  in  the  case  of 
interest  on  all  corporate  indebtedness  and 
dividends  on  foreign  corporate  indebtedness 
as  herein  stated)  does  not  exceed  $3000  for 
any  taxable  year,  or  for  such  portion  of  the 
year  1913,  as  before  stated. 

Under  the  provisions  of  Paragraph  G  the  normal  tax 
will  be  levied  upon  the  entire  net  income  arising  or 
accruing  from  all  sources  during  the  preceding  cal- 
endar year  to  corporations  and  others  organized  in  the 
United  States,  not  including  partnerships:  If  organ- 
ized, authorized,  or  existing  under  the  laws  of  a  for- 
eign country,  then  upon  the  net  income  accruing  from 
business  transacted  and  capital  invested  within  the 
United  States  during  such  year. 

Under  subdivision  C  a  return  is  to  be  made  by  the  cor- 
porations and  others  enumerated  in  said  paragraph  on  or 
before  the  first  day  of  March  1914,  and  upon  the  first  day 
of  said  month  annually  thereafter,  or  in  case  of  a  day  des- 
ignated by  such  corporation  within  sixty  days  after  the 

17 


ANALYSIS  AND   INTERPRETATION    OF 

close  of  its  fixed  year  and  each  year  thereafter.  In  case 
of  a  foreign  corporation  the  return  is  to  be  made  in  the 
place  where  its  principal  business  is  located  in  the  United 
States. 

Such  return  must  be  made  under  the  oath  or  affirmation 
of  the  president,  vice  president  or  other  principal  officer,  and 
its  treasurer  or  assistant  treasurer,  to  the  collector  of  in- 
ternal revenue  for  the  district  in  which  it  has  its  principal 
place  of  business.  Subject  to  the  following  exclusions,  the 
return  shall  set  forth : 

•  First —  The  total  amount  of  its  paid  up  capital 
stock  outstanding,  or  if  no  capital  stock 
its  capital  employed  in  business  at  the 
close  of  the  year. 

Second — The  total  amount  of  its  bonded  and 
other  indebtedness  at  the  close  of  the 
year. 

Third —  The  gross  amount  of  its  income  received 
during  the  year  from  all  sources,  includ- 
ing dividends  on  the  capital  stock  or 
from  the  net  earnings  of  corporations, 
taxable  on  their  net  income.  If  the  cor- 
poration is  organized  under  the  laws  of 
a  foreign  country,  the  amount  of  its  in- 
come received  within  the  year  from  the 
business  transacted  and  capital  invested 
in  the  United  States  must  be  stated. 

There  shall  be  excluded,  in  said  return,  from  the  gross 
income  the  following  income  received  during  said  year: 

a — The  interest  received  upon  the  obligations  of  a 
State  or  any  political  subdivision  thereof,  and 
upon  the  obligations  of  the  United  States  or 
its  possessions,  or  of  the  District  of  Columbia. 

b — The  income  received  from  any  public  utility 
by  any  State,  Territory,  or  the  District  of  Co- 
lumbia or  any  political  subdivision  of  either, 

18 


THE     FEDERAL     INCOME     TAX     LAW 

or  accruing  to  the  Philippine  Islands,  or  Porto 
Rico,  or  any  political  subdivision  of  the  same. 
Under  Par.  G. 
c — The  income  received  by  agricultural  or  horti- 
cultural organizations;  mutual  savings  banks 
not  having  a  capital  stock  represented  by 
shares;  fraternal  beneficiary  societies;  orders 
or  associations  operating  under  the  lodge  sys- 
tem and  providing  for  the  payment  of  life, 
sick,  accident  and  other  benefits  to  members 
of  such  societies,  orders  or  associations  and 
others  enumerated  in  Paragraph  G,  that  are 
not  organized  for  profit,  all  of  which  are  ex- 
empt form  the  tax  under  said  paragraph. 

From  the  gross  income  ascertained,  there  shall  be  de- 
ducted the  following  allowances  in  order  to  ascertain  net 
taxable  income  as  stated  in  subdivision  (b)  of  Para- 
graph G: 

First —  All  the  ordinary  and  necessary  expenses 
paid  within  the  year  in  the  maintenance 
and  operation  of  its  properties  and  busi- 
ness, including  rentals  and  other  pay- 
ments required  to  be  made  as  a  condition 
to  the  continued  use  or  possession  of 
its  property. 

Second — All  losses  actually  sustained  within  the 
year  and  not  compensated  by  insurance 
or  otherwise,  including  a  reasonable  al- 
lowance for  depreciation  by  use,  wear, 
and  tear  of  property,  if  any;  and  in  case 
of  mines  a  reasonable  allowance  for  de- 
pletion of  ores  and  all  other  natural  de- 
posits, not  exceeding  5  per  centum  of 
the  gross  value  at  the  mine  of  the  output 
for  the  year  for  which  the  computation 
is  made;  and  in  the  case  of  insurance 
companies  the  net  addition,  if  any,  re- 
quired by  law  to  be  made  within  the  year 
to  reserve  funds  and  the  sums  other  than 

19 


ANALYSIS  AND   INTERPRETATION    OF 

dividends  paid  within  the  year  on  policy 
and  annuity  contracts. 

Third —  The  amount  of  interest  accrued  and  paid 
within  the  year  on  its  indebtedness  to 
an  amount  of  such  indebtedness  not  ex- 
ceeding one-half  of  the  interest-bearing 
indebtedness  and  its  paid  up  capital 
stock  outstanding  at  the  close  of  the 
year,  or  if  no  capital  stock  the  amount 
of  interest  paid  within  the  year  on  an 
amount  of  its  indebtedness  not  exceed- 
ing the  amount  of  capital  employed  in 
the  business  at  the  close  of  the  year.  In 
the  case  of  indebtedness  wholly  secured 
by  collateral  the  subject  of  sale  in  ordi- 
nary business  of  such  corporation,  joint 
stock  company  or  association,  the  total 
interest  secured  and  paid  by  such  com- 
pany, corporation,  or  association  within 
the  year  on  any  such  indebtedness  may 
be  deducted  as  a  part  of  its  expense  of 
doing  business.  That  in  case  of  bonds 
or  other  indebtedness  which  have  been 
issued  with  a  guaranty  that  the  interest 
payable  thereon  shall  be  free  from  tax- 
ation, no  deduction  for  the  payment  of 
the  tax  herein  imposed  shall  be  allowed. 
Banks,  banking  associations,  loan  and 
trust  companies  may  also  deduct  the  in- 
terest paid  within  the  year  on  deposits, 
or  on  moneys  received  for  investment 
and  secured  by  interest-bearing  certifi- 
cates of  indebtedness. 

Fourth — All  sums  paid  within  the  taxable  year 
for  taxes  imposed  under  authority  of  the 
United  States,  or  of  any  State  or  Terri- 
tory thereof,  or  imposed  by  the  Govern- 
ment of  any  foreign  country. 

In  the  case  of  corporations  joint-stock  companies  or  asso- 
ciations,   or    insurance    companies   organized,    or    existing 

20 


THE     FEDERAL     INCOME     TAX     LAW 

under  the  laws  of  a  foreign  country  such  net  income  shall 
be  ascertained  by  making  the  same  deductions  that  are  ap- 
plicable to  domestic  corporations,  except  that  the  same  will 
be  applied  only  to  the  business  and  property  of  such  cor- 
poration in  the  United  States.  This  statement  is  made, 
however,  with  the  following  qualifications :  That  the  amount 
of  interest  to  be  deducted  shall  be  the  amount  accrued  and 
paid  within  the  year  on  corporate  indebtedness  to  an  amount 
of  such  indebtedness  not  exceeding  the  proportion  of  one- 
half  of  the  sum  of  its  interest  bearing  indebtedness  and  its 
paid-up  capital  stock  outstanding  at  the  close  of  the  year, 
or  if  no  capital  stock  the  capital  employed  in  the  business 
at  the  close  of  the  year  which  the  gross  amount  of  its  in- 
come for  the  year  from  business  transacted  and  capital  in- 
vested within  the  United  States  bears  to  the  gross  amount 
of  its  income  derived  from  all  sources  within  and  without 
the  United  States. 

In  the  case  of  foreign  or  domestic  assessment  insurance 
companies  the  actual  deposit  of  sums  with  State  or  Terri- 
torial officers,  pursuant  to  law,  as  additions  to  guarantee  or 
reserve  funds  shall  be  treated  as  being  payments  required 
by  law  to  reserve  funds,  and  therefore  are  not  taxable. 

Mutual  fire  insurance  companies  requiring  their  mem- 
bers to  make  premium  deposits  to  provide  for  losses  and 
expenses  shall  not  return  as  income  any  portion  of  the 
premium  deposits  returned  to  their  policyholders,  but  shall 
return  as  taxable  income  all  income  received  by  them  from 
all  sources  plus  such  portions  of  premium  deposits  as  are 
retained  by  the  companies  for  purposes  other  than  payment 
of  losses  and  expenses  and  insurance  reserves. 

Mutual  marine  insurance  companies  shall  include  in  their 
gross  income  gross  premiums  collected  and  received  by  them 
less  amounts  paid  for  reinsurance,  but  shall  be  entitled  to 
include  in  deductions  from  gross  income  amounts  paid  to 

21 


ANALYSIS   AND   INTERPRETATION    OF 

policyholders  on  account  of  premiums  previously  paid  by 
them,  and  interest  paid  upon  such  amounts  between  the 
ascertainment  thereof  and  the  payment  thereof. 

Life  insurance  companies  shall  not  include  as  income  in 
any  year  such  portion  of  any  actual  premium  received  from 
any  individual  policyholder  as  shall  have  been  paid  back  or 
credited  to  him,  or  treated  as  an  abatement  of  premium  of 
such  individual  policyholder  within  the  year. 

All  of  the  foregoing  provisions  which  relate  to  domestic 
mutual  life  insurance  companies,  mutual  fire  insurance  com- 
panies and  mutual  marine  insurance  companies,  are  appli- 
cable to  foreign  companies  but  apply  only  to  the  business 
done  in  the  United  States. 

The  tax  herein  imposed  upon  corporations  shall  be  upon 
their  entire  net  income  accruing  within  each  preceding  cal- 
endar year  ending  December  31st:  Provided  however  that 
for  the  months  of  January  and  February  1913,  the  tax 
shall  be  only  one-sixth  of  the  entire  net  income  of  such  cor- 
poration etc.  ascertained  in  the  manner  hereinbefore  stated 
in  Par.  G.  Any  corporation,  joint-stock  company  or  asso- 
ciation or  insurance  company  subject  to  this  tax  may  desig- 
nate the  last  day  of  any  month  in  any  year  as  the  day  of  the 
closing  of  its  fiscal  year  and  shall  be  entitled  to  have  the  tax 
payable  by  it  computed  upon  the  basis  of  the  net  income 
ascertained  as  hereinbefore  provided  for  the  year  ending  on 
the  day  so  designated  in  the  year  preceding  the  date  of  as- 
sessment, instead  of  upon  the  basis  of  the  net  income  for 
the  calendar  year  preceding  the  date  of  assessment.  Notice 
must  be  given  the  collector  of  the  designation  of  such  day 
not  later  than  30  days  prior  to  the  first  day  of  March  each 
year. 

As  soon  as  the  return  of  a  corporation  has  been  received 
by  the  collector  of  internal  revenue  he  will  transmit  the 
same  to  the  Commissioner  of  Internal  Revenue  for  the  pur- 

22 


THE     FEDERAL     INCOME     TAX     LAW 

pose  of  the  assessment  of  the  tax  thereon.  Notice  will  be 
sent  to  such  corporation  of  the  amount  of  the  tax  on  or 
before  the  first  day  of  June  each  year  and  the  tax  must  be 
paid  on  or  before  the  30th  day  of  such  month.  In  those 
cases  where  there  has  been  a  day  designated  by  the  corpor- 
ation as  the  close  of  the  fiscal  year  the  tax  due  under  said 
assessment  shall  be  paid  within  one  hundred  and  twenty 
days  after  the  date  upon  which  the  corporation  is  required 
to  file  a  list  or  return  of  income  for  assessment. 

The  Act  approved  August  5,  1909  relative  to  the  im- 
position of  an  excise  tax  upon  corporations  has  been  re- 
pealed and  re-enacted  in  Section  4  of  the  Tarifif  Act  approved 
October  3,  1913,  which  act  abolishes  the  specific  deduction 
of  $5000;  but  permits  income  derived  from  the  obligations 
of  the  United  States  or  its  possessions,  or  of  any  State,  or 
a  political  subdivision  thereof,  or  of  the  District  of  Co- 
lumbia to  be  deducted  in  the  ascertainment  of  net  income 
subject  to  the  normal  tax. 

The  provisions  of  the  Act  of  August  5,  1909  shall  re- 
main in  force  for  the  collection  of  the  excise  tax  for  the 
year  1912;  but  for  the  year  1913,  it  shall  not  be  necessary 
to  make  more  than  one  return  and  assessment  for  all  the 
taxes  imposed  herein  upon  said  corporations,  joint-stock 
companies  or  associations  and  insurance  companies  either 
by  way  of  income  or  excise,  which  return  shall  be  made  at 
the  times  and  in  the  manner  provided  in  the  Act  of  October 
3,  1913. 

The  word  State  or  United  States,  when  used  in  this 
Act  shall  be  construed  to  include  any  Territory,  Alaska, 
the  District  of  Columbia,  Porto  Rico,  and  the  Philippine 
Islands,  when  such  construction  is  necessary  to  carry  out 
its  provisions. 

Penalties  are  provided  for  a  failure  to  comply  with  the 
provisions  of  the  act  as  follows: 

23 


ANALYSIS  AND   INTERPRETATION   OF 

Under  Paragraph  E,  a  penalty  is  imposed  for  a  neglect 
or  refusal  to  make  a  return  or  for  one  fraudulently  made. 

Under  subdivision  2  of  said  Paragraph  a  penalty  of  $300 
is  imposed  upon  the  individual  for  falsely  stating  a  material 
fact  in  reference  to  a  claim  for  exemption  under  Para- 
graph C. 

Under  the  provisions  of  Paragraph  F,it  is  provided :  "That 
if  any  person  corporation  joint-stock  company,  association 
or  insurance  company  liable  to  make  a  return  or  to  pay  the 
tax  aforesaid  shall  refuse  or  neglect  to  make  a  return  at 
the  time  or  times  hereinbefore  specified  in  each  year,  such 
person  shall  be  liable  to  a  penalty  of  not  less  than  $20  nor 
more  than  $1000.  Any  person  or  any  officer  of  any  cor- 
poration required  by  law  to  mak^,  render,  sign,  or  verify 
any  return  who  makes  any  false  or  fraudulent  return  or 
statement  with  intent  to  defeat  or  evade  the  assessment  re- 
quired by  this  Act  to  be  made  shall  be  guilty  of  a  misde- 
meanor, and  shall,  be  fined  not  exceeding  $2000  or  be  im- 
prisoned not  exceeding  one  year  or  both,  at  the  discretion 
of  the  court." 

Under  subsection  c,  of  Paragraph  G,  a  penalty  is  imposed 
for  a  neglect  or  refusal,  to  make  a  return  by  a  corporation 
or  for  one  fraudulently  made.  And  under  Subdivision  d, 
of  said  Paragraph  a  penalty  of  $1000  is  imposed  upon  cor- 
porations, joint-stock  companies  or  associations  or  insur- 
ance companies  for  a  refusal  or  neglect  to  make  a  return 
at  the  time  or  times  specified  in  each  year,  or  for  a  fraudu- 
lent or  false  return. 

If  any  person  shall  be  compelled  to  pay  a  tax  on  his  re- 
turn which  was  unlawfully  assessed  and  collected,  or  exces- 
sive in  amount,  he  may  file  his  claim  for  refund  of  such 
tax  with  the  collector  under  regulations  made  and  provided 
in  such  cases  by  the  Secretary  of  the  Treasury,  under  the 
provisions  of  Section  3220  of  the  Revised  Statutes  of  the 
United  States.     If  relief  is  denied  by  the  Commissioner  of 

24 


THE     FEDERAL     INCOME     TAX     LAW 

Internal  Revenue,  or  if  such  officer  fails  to  render  a  decision 
on  said  claim  in  six  months  from  the  date  of  its  submis- 
sion, the  courts  are  open  to  the  taxpayer  to  obtain  a  judg- 
ment against  the  United  States  or  the  collector  for  the 
amount  of  said  tax  wrongfully  collected. 

The  payment  of  the  tax  illegally  assessed  should  be  made 
under  protest  and  must  not  be  a  voluntary  one,  but  made 
under  duress,  that  is,  under  threat  to  distrain  and  sell  the 
taxpayer's  property  unless  such  payment  is  made.  The 
reasons  for  the  protest  should  be  stated  therein  and,  after 
being  dated  and  signed  by  the  taxpayer,  handed  to  the  col- 
lecting officer  and  a  copy  thereof  retained. 

Under  Treasury  Decision  1934,  of  January  16,  1914,  in 
all  cases  herein  mentioned  where  the  tax  is  levied  upon 
income  in  excess  of  $3000  for  the  taxable  year  the  tax 
will  be  assessed  upon  such  income  if  the  same  is  $2500  or 
more  for  the  ten  months  from  March  1st  to  December 
31,  1913. 

This  analysis  and  interpretation  of  the  income  tax  law 
comprehends  all  Treasury  Regulations  and  decisions  to 
January  16,  1914. 


25 


THE     FEDERAL     INCOME     TAX     LAW 

INCOME   TAX   LAW 

OF 

OCTOBER  3,  1913 


Section  II. 

A.  Subdivision  1.  That  there  shall  be  levied,  assessed, 
collected  and  paid  annually  upon  the  entire  net  income  aris- 
ing or  accruing  from  all  sources  in  the  preceding  calendar 
year  to  every  citizen  of  the  United  States,  whether  residing 
at  home  or  abroad,  and  to  every  person  residing  in  the 
United  States,  though  not  a  citizen  thereof,  a  tax  of  1  per 
centum  per  annum  upon  such  income,  except  as  hereinafter 
provided ;  and  a  like  tax  shall  be  assessed,  levied,  collected, 
and  paid  annually  upon  the  entire  net  income  from  all  prop- 
erty owned  and  of  every  business,  trade,  or  profession  car- 
ried on  in  the  United  States  by  persons  residing  elsewhere. 

Subdivision  2.  In  addition  to  the  income  tax  provided 
under  this  section  (herein  referred  to  as  the  normal  income 
tax)  there  shall  be  levied,  assessed,  and  collected  upon  the 
net  income  of  every  individual  an  additional  income  tax 
(herein  referred  to  as  the  additional  tax)  of  1  per  centum 
per  annum  upon  the  amount  by  which  the  total  net  income 
exceeds  $20,000  and  does  not  exceed  $50,000,  and  2  per 
centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $50,000  and  does  not  exceed  $75,000,  3  per 
centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceed  $75,000  and  does  not  exceed  $100,000,  4  per 
centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $100,000  and  does  not  exceed  $250,000, 
5  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $250,000  and  does  not  exceed  $500,000, 

27 


ANALYSIS  AND   INTERPRETATION   OF 

and  6  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $500,000.  All  the  provisions 
of  this  section  relating  to  individuals  who  are  to  be  charge- 
able with  the  normal  income  tax,  so  far  as  they  are  appli- 
cable and  are  not  inconsistent  with  this  subdivision  of 
paragraph  A,  shall  apply  to  the  levy,  assessment,  and  col- 
lection of  the  additional  tax  imposed  under  this  section. 
Every  person  subject  to  this  additional  tax  shall,  for  the 
purpose  of  its  assessment  and  collection,  make  a  personal 
return  of  his  total  net  income  from  all  sources,  corporate 
or  otherwise,  for  the  preceding  calendar  year,  under  rules 
and  regulations  to  be  prescribed  by  the  Commissioner  of 
Internal  Revenue  and  approved  by  the  Secretary  of  the 
Treasury.  For  the  purpose  of  this  additional  tax  the  tax- 
able income  of  any  individual  shall  embrace  the  share  to 
which  he  would  be  entitled  of  the  gains  and  profits,  if  di- 
vided or  distributed,  whether  divided  or  distributed  or  not, 
of  all  corporations,  joint-stock  companies,  or  associations 
however  created  or  organized,  formed  or  fraudulently 
availed  of  for  the  purpose  of  preventing  the  imposition  of 
such  tax  through  the  medium  of  permitting  such  gains  and 
profits  to  accumulate  instead  of  being  divided  or  dis- 
tributed; and  the  fact  that  any  such  corporation,  joint- 
stock  company,  or  association,  is  a  mere  holding  company, 
or  that  the  gains  and  profits  are  permitted  to  accumulate 
beyond  the  reasonable  needs  of  the  business  shall  be  prima 
facie  evidence  of  a  fraudulent  purpose  to  escape  such  tax; 
but  the  fact  that  the  gains  and  profits  are  in  any  case  per- 
mitted to  accumulate  and  become  surplus  shall  not  be  con- 
strued as  evidence  of  a  purpose  to  escape  the  said  tax  in 
such  case  unless  the  Secretary  of  the  Treasury  shall  certify 
that  in  his  opinion  such  accumulation  is  unreasonable  for 
the  purposes  of  the  business.  When  requested  by  the 
Commissioner  of  Internal  Revenue,  or  any  district  collector 
of  internal  revenue,  such  corporation,  joint-stock  company, 
or  association  shall  forward  to  him  a  correct  statement  of 
such  profits  and  the  names  of  the  individuals  who  would 
be  entitled  to  the  same  if  distributed. 

B.     That,  subject  only  to  such  exemptions  and  deduc- 
tions as  are  hereinafter  allowed,  the  net  income  of  a  tax- 

28 


THE     FEDERAL     INCOME     TAX     LAW 

able  person  shall  include  gains,  profits,  and  income  derived 
from  salaries,  wages,  or  compensation  for  personal  service 
of  v^hatever  kind  and  in  whatever  form  paid,  or  from  pro- 
fessions, vocations,  businesses,  trade,  commerce,  or  sales, 
or  dealings  in  property,  whether  real  or  personal,  growing 
out  of  the  ownership  or  use  of  or  interest  in  real  or  per- 
sonal property,  also  from  interest,  rent,  dividends,  se- 
curities, or  the  transaction  of  any  lawful  business  carried 
on  for  gain  or  profit,  or  gains  or  profits  and  income  derived 
from  any  source  whatever,  including  the  income  from  but 
not  the  value  of  property  acquired  by  gift,  bequest,  devise, 
or  descent:  Provided^  That  the  proceeds  of  life  insurance 
policies  paid  upon  the  death  of  the  person  insured  or  pay- 
ments made  by  or  credited  to  the  insured,  on  life  insurance, 
endowment,  or  annuity  contracts,  upon  the  return  thereof 
to  the  insured  at  the  maturity  of  the  term  mentioned  in  the 
contract,  or  upon  surrender  of  contract,  shall  not  be  in- 
cluded as  income. 

That  in  computing  net  income  for  the  purpose  of  the 
normal  tax  there  shall  be  allowed  as  deductions:  First,  the 
necessary  expenses  actually  paid  in  carrying  on  any  busi- 
ness, not  including  personal,  living,  or  family  expenses; 
second,  all  interest  paid  within  the  year  by  a  taxable  person 
on  indebtedness;  third,  all  national.  State,  county,  school, 
and  municipal  taxes  paid  within  the  year,  not  including  those 
assessed  against  local  benefits;  fourth,  losses  actually  sus- 
tained during  the  year,  incurred  in  trade  or  arising  from 
fires,  storms,  or  shipwreck,  and  not  compensated  for  by 
insurance  or  otherwise;  fifth,  debts  due  to  the  taxpayer 
actually  ascertained  to  be  worthless  and  charged  ofT  within 
the  year;  sixth,  a  reasonable  allowance  for  the  exhaustion, 
wear  and  tear  of  property  arising  out  of  its  use  or  employ- 
ment in  the  business,  not.  to  exceed,  in  the  case  of  mines, 
5  per  centum  of  the  gross  value  at  the  mine  of  the  output 
for  the  year  for  which  the  computation  is  made,  but  no 
deduction  shall  be  made  for  any  amount  of  expense  of  re- 
storing property  or  making  good  the  exhaustion  thereof 
for  which  an  allowance  is  or  has  been  made:  Provided, 
That  no  deduction  shall  be  allowed  for  any  amount  paid 
out  for  new  buildings,  permanent  improvements,  or  better- 

29 


ANALYSIS   AND   INTERPRETATION    OF 


ments,  made  to  increase  the  value  of  any  property  or 
estate;  (seventh,  the  amount  received  as  dividends  upon 
the  stock  or  from  the  net  earnings  of  any  corporation,  joint 
stock  company,  association,  or  insurance  company  which 
is  taxable  upon  its  net  income  as  hereinafter  provided;) 
eighth,  the  amount  of  income,  the  tax  upon  which  has  been 
paid  or  withheld  for  payment  at  the  source  of  the  income, 
under  the  provisions  of  this  section,  provided  that  when- 
ever the  tax  upon  the  income  of  a  person  is  required  to  be 
withheld  and  paid  at  the  source  as  hereinafter  required,  if 
such  annual  income  does  not  exceed  the  sum  of  $3,000  or 
is  not  fixed  or  certain,  or  is  indefinite,  or  irregular  as  to 
amount  or  time  of  accrual,  the  same  shall  not  be  deducted 
in  the  personal  return  of  such  person. 

The  net  income  from  property  owned  and  business 
carried  on  in  the  United  States  by  persons  residing  else- 
where shall  be  computed  upon  the  basis  prescribed  in  this 
paragraph  and  that  part  of  paragraph  G  of  this  section  re- 
lating to  the  computation  of  the  net  income  of  corporations, 
joint-stock  and  insurance  companies,  organized,  created,  or 
existing  under  the  laws  of  foreign  countries,  in  so  far  as 
applicable. 

That  in  computing  net  income  under  this  section  there 
shall  be  excluded  the  interest  upon  the  obligations  of  a 
State  or  any  political  subdivision  thereof,  and  upon  the 
obligations  of  the  United  States  or  its  possessions;  also 
the  compensation  of  the  present  President  of  the  United 
States  during  the  term  for  which  he  has  been  elected,  and 
of  the  judges  of  the  supreme  and  inferior  courts  of  the 
United  States  now  in  office,  and  the  compensation  of  all 
officers  or  employees  of  a  State  or  any  political  subdivision 
thereof  except  when  such  compensation  is  paid  by  the 
United  States  Government. 

C.  That  there  shall  be  deducted  from  the  amount  of 
the  net  income  of  each  of  said  persons,  ascertained  as  pro- 
vided herein,  the  sum  of  $3,000,  plus  $1,000  additional  if 
the  person  making  the  return  be  a  married  man  with  a  wife 
living  with  him,  or  plus  the  sum  of  $1,000  additional  if 
the  person  making  the  return  be  a  married  woman  with  a 
husband  living  with  her;  but  in  no  event  shall  this  addi- 

30 


THE     FEDERAL     INCOME     TAX     LAW 

tional  exemption  of  $1,000  be  deducted  by  both  a  husband 
and  a  wife:  Provided,  That  only  one  deduction  of  $4,000 
shall  be  made  from  the  aggregate  income  of  both  husband 
and  wife  when  living  together. 

D.  The  said  tax  shall  be  computed  upon  the  remainder 
of  said  net  income  of  each  person  subject  thereto,  accruing 
during  each  preceding  calender  year  ending  December 
thirty-first:  Provided,  however,  That  for  the  year  ending 
December  thirty-first,  nineteen  hundred  and  thirteen,  said 
tax  shall  be  computed  on  the  net  income  accruing  from 
March  first  to  December  thirty-first,  nineteen  hundred  and 
thirteen,  both  dates  inclusive,  after  deducting  five-sixths 
only  of  the  specific  exemptions  and  deductions  herein  pro- 
vided for.  On  or  before  the  first  day  of  March,  nineteen 
hundred  and  fourteen,  and  the  first  day  of  March  in  each 
year  thereafter,  a  true  and  accurate  return,  under  oath  or 
affirmation,  shall  be  made  by  each  person  of  lawful  age, 
except  as  hereinafter  provided,  subject  to  the  tax  imposed 
by  this  section,  and  having  a  net  income  of  $3,000  or  over 
for  the  taxable  year,  to  the  collector  of  internal  revenue 
for  the  district  in  which  such  person  resides  or  has  his 
principal  place  of  business,  or,  in  the  case  of  a  person 
residing  in  a  foreign  country,  in  the  place  where  his  prin- 
cipal business  is  carried  on  within  the  United  States,  in 
such  form  as  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  shall  pre- 
scribe, setting  forth  specifically  the  gross  amount  of  in- 
come from  all  separate  sources  and  from  the  total  thereof, 
deducting  the  aggregate  items  or  expenses  and  allowance 
herein  authorized;  guardians,  trustees,  executors,  admin- 
istrators, agents,  receivers,  conservators,  and  all  persons, 
corporations,  or  associations  acting  in  any  fiduciary  capa- 
city, shall  make  and  render  a  return  of  the  net  income  of 
the  person  for  whom  they  act,  subject  to  this  tax,  coming 
into  their  custody  or  control  and  management,  and 
be  subject  to  all  the  provisions  of  this  section 
which  apply  to  individuals:  Provided,  That  a  return 
made  by  one  or  two  or  more  joint  guardians, 
trustees,  executors,  administrators,  agents,  receivers,  and 
conservators,    or    other    persons    acting    in    a    fiduciary 

31 


ANALYSIS  AND   INTERPRETATION    OF 

capacity,  filed  in  the  district  where  such  person  re- 
sides, or  in  the  district  where  the  will  or  other  instrument 
under  which  he  acts  is  recorded,  under  such  regulations  as 
the  Secretary  of  the  Treasury  may  prescribe,  shall  be  a 
sufficient  compliance  with  the  requirements  of  this  para- 
graph; and  also  all  persons,  firms,  companies,  copartner- 
ships, corporations,  joint-stock  companies  or  associations, 
and  insurance  companies,  except  as  hereinafter  provided, 
in  whatever  capacity  acting,  having  the  control,  receipt, 
disposal,  or  payment  of  fixed  or  determinable  annual  or 
periodical  gains,  profits,  and  income  of  another  person  sub- 
ject to  tax,  shall  in  behalf  of  such  person  deduct  and  with- 
hold from  the  payment  an  amount  equivalent  to  the  normal 
income  tax  upon  the  same  and  make  and  render  a  return, 
as  aforesaid,  but  separate  and  distinct,  of  the  portion  of 
the  income  of  each  person  from  which  the  normal  tax  has 
been  thus  withheld,  and  containing  also  the  name  and  ad- 
dress of  such  person  or  stating  that  the  name  and  address 
or  the  address,  as  the  case  may  be,  are  unknown :  Provided, 
That  the  provision  requiring  the  normal  tax  of  individuals 
to  be  withheld  at  the  source  of  the  income  shall  not  be 
construed  to  require  any  of  such  tax  to  be  withheld  prior 
to  the  first  day  of  November,  nineteen  hundred  and 
thirteen:  Provided  farther,  That  in  either  case  above  men- 
tioned no  return  of  income  not  exceeding  $3,000  shall  be 
required:  Provided  further,  That  any  person  carrying  on 
business  in  partnership  shall  be  liable  for  income  tax  only 
in  their  individual  capacity,  and  the  share  of  the  profits  of 
a  partnership  to  which  any  taxable  partner  would  be  en- 
titled if  the  same  were  divided,  whether  divided  or  other- 
wise, shall  be  returned  for  taxation  and  the  tax  paid,  under 
the  provisions  of  this  section,  and  any  such  firm,  when  re- 
quested by  the  Commissioner  of  Internal  Revenue,  or  any 
district  collector,  shall  forward  to  him  a  correct  statement 
of  such  profits  and  the  names  of  the  individuals  who  would 
be  entitled  to  the  same,  if  distributed:  Provided  further, 
That  persons  liable  for  the  normal  income  tax  only,  on 
their  own  account  or  in  behalf  of  another,  shall  not  be  re- 
quired to  make  return  of  the  income  derived  from  divi- 
dends on  the  capital  stock  or   from  the  net  earnings  of 

32 


THE     FEDERAL     INCOME     TAX     LAW 

corporations,  joint-stock  companies  or  associations,  and  in- 
surance companies  taxable  upon  their  net  income  as  herein- 
after provided.  Any  person  for  whom  return  has  been 
made  and  the  tax  paid,  or  to  be  paid  as  aforesaid,  shall  not 
be  required  to  make  a  return  unless  such  person  has  other 
net  income,  but  only  one  deduction  of  $3,000  shall  be  made 
in  the  case  of  any  such  person.  The  collector  or  deputy 
collector  shall  require  every  list  to  be  verified  by  the  oath 
or  affirmation  of  the  party  rendering  it.  If  the  collector 
or  deputy  collector  have  reason  to  believe  that  the  amount 
of  any  income  returned  is  understated,  he  shall  give  due 
notice  to  the  person  making  the  return  to  shov^  cause  why 
the  amount  of  the  return  should  not  be  increased,  and  upon 
proof  of  the  amount  understated  may  increase  the  same 
accordingly.  If  dissatisfied  with  the  decision  of  the  col- 
lector, such  person  may  submit  the  case,  with  all  the  papers, 
to  the  Commissioner  of  Internal  Revenue  for  his  decision, 
and  may  furnish  sworn  testimony  of  witnesses  to  prove 
any  relevant  facts. 

E.  That  all  assessments  shall  be  made  by  the  Com- 
missioner of  Internal  Revenue  and  all  persons  shall  be  noti- 
fied of  the  amounts  for  which  they  are  respectively  liable 
on  or  before  the  first  day  of  June  of  each  successive  year, 
and  said  assessments  shall  be  paid  on  or  before  the  thirtieth 
day  of  June,  except  in  cases  of  refusal  or  neglect  to  make 
sucli  return  and  in  cases  of  false  or  fraudulent  returns,  in 
which  cases  the  Commissioner  of  Internal  Revenue  shall, 
upon  the  discovery  thereof,  at  any  time  within  three  years 
after  said  return  is  due,  make  a  return  upon  information 
obtained  as  provided  for  in  this  section  or  by  existing  law, 
and  the  assessment  made  by  the  Commissioner  of  Internal 
Revenue  thereon  shall  be  paid  by  such  person  or  persons 
immediately  upon  notification  of  the  amount  of  such  as- 
sessment; and  to  any  sum  or  sums  due  and  unpaid  after 
the  thirtieth  day  of  June  in  any  year,  and  for  ten  days 
after  notice  and  demand  thereof  by  the  collector,  there 
shall  be  added  the  sum  of  5  per  centum  on  the  amount  of 
tax  unpaid,  and  interest  at  the  rate  of  1  per  centum  per 
month  upon  said  tax  from  the  time  the  same  became  due, 

33 


ANALYSIS   AND   INTERPRETATION    OF 

except  from  the  estates  of  insane,  deceased,  or  insolvent 
persons. 

All  persons,  firms,  copartnerships,  companies,  corpora- 
tions, joint-stock  companies  or  associations,  and  insurance 
companies,  in  whatever  capacity  acting,  including  lessees 
or  mortgagors  of  real  or  personal  property,  trustees  acting 
in  any  trust  capacity,  executors,  administrators,  agents, 
receivers,  conservators,  employers,  and  all  officers  and  em- 
ployees of  the  United  States  having  the  control,  receipt, 
custody,  disposal,  or  payment  of  interest,  rent,  salaries, 
wages,  premiums,  annuities,  compensation,  remuneration, 
emoluments,  or  other  fixed  or  determinable  annual  gains, 
profits,  and  income  of  another  person,  exceeding  $3,000 
for  any  taxable  year,  other  than  dividends  on  capital  stock, 
or  from  the  net  earnings  of  corporations  and  joint-stock 
companies  or  associations  subject  to  like  tax,  who  are  re- 
quired to  make  and  render  a  return  in  behalf  of  another,  as 
provided  herein,  to  the  collector  of  his,  her,  or  its  district, 
are  hereby  authorized  and  required  to  deduct  and  withhold 
from  such  annual  gains,  profits,  and  income  such  sum  as  will 
be  sufficient  to  pay  the  normal  tax  imposed  thereon  by  this 
section,  and  shall  pay  to  the  officer  of  the  United  States 
Government  aulhorized  to  receive  the  same;  and  they  are 
each  hereby  made  personally  liable  for  such  tax.  In  all 
cases  where  the  income  tax  of  a  person  is  withheld  and 
deducted  and  paid  or  to  be  paid  at  the  source,  as  aforesaid, 
such  person  shall  not  receive  the  benefit  of  the  deduction 
aiid  exemption  allowed  in  paragraph  C  of  this  section  ex- 
cept by  an  application  for  refund  of  the  tax  unless  he 
shall,  not  less  than  thirty  days  prior  to  the  day  on  which 
the  return  of  his  income  is  due,  file  with  the  person  who 
is  required  to  withold  and  pay  tax  for  him,  a  signed  notice 
in  writing  claiming  the  benefit  of  such  exemption  and 
thereupon  no  tax  shall  be  withheld  upon  the  amount  of 
such  exemption:  Provided,  That  if  any  person  for  the 
purpose  of  obtaining  any  allowance  or  reduction  by  virtue 
of  a  claim  for  such  exemption,  either  for  himself  or  for 
any  other  person,  knowingly  makes  any  false  statement  or 
false  or  fraudulent  representation,  he  shall  be  liable  to  a 
penalty  of  $300;  nor  shall  any  person  under  the  foregoing 

34 


THE     FEDERAL     INCOME     TAX     LAW 


conditions  be  allowed  the  benefit  of  any  deduction  pro- 
vided for  in  subsection  B  of  this  section  unless  he  shall, 
not  less  than  thirty  days  prior  to  the  day  on  which  the 
return  of  his  income  is  due,  either  file  wnth  the  person  who 
is  required  to  withhold  and  pay  tax  for  him  a  true  and 
correct  return  of  his  annual  gains,  profits,  and  income  from 
all  other  sources,  and  also  the  deductions  asked  for,  and 
the  showing  thus  made  shall  then  become  a  part  of  the 
return  to  be  made  in  his  behalf  by  the  person  required  to 
withhold  and  pay  the  tax,  or  likewise  make  application  for 
deductions  to  the  collector  of  the  district  in  which  return 
is  made  or  to  be  made  for  him :  Provided  further,  That  if 
such  person  is  a  minor  or  an  insane  person,  or  is  absent 
from  the  United  States,  or  is  unable  owing  to  serious  ill- 
ness to  make  the  return  and  application  above  provided  for, 
the  return  and  application  may  be  made  for  him  or  her  by 
the  person  required  to  withhold  and  pay  the  tax,  he  mak- 
ing oath  under  the  penalties  of  this  Act  that  he  has  suffi- 
cient knowledge  of  the  affairs  and  property  of  his  bene- 
ficiary to  enable  him  to  make  a  full  and  complete  return  for 
him  or  her,  and  that  the  return  and  application  made  by 
him  are  full  and  complete :  Provided  further,  That  the 
amount  of  the  normal  tax  hereinbefore  imposed  shall  be 
deducted  and  withheld  from  fixed  and  determinable  annual 
gains,  profits,  and  income  derived  from  interest  upon  bonds 
and  mortgages,  or  deeds  of  trust  or  other  simjlar  obliga- 
tions of  corporations,  joint-stock  companies  or  associations, 
and  insurance  companies,  whether  payable  annually  or  at 
shorter  or  longer  periods,  although  such  interest  does  not 
amount  to  $3,000,  subject  to  the  provisions  of  this  section 
requiring  the  tax  to  be  withheld  at  the  source  and  de- 
ducted from  annual  income  and  paid  to  the  Government; 
and  likewise  the  amount  of  such  tax  shall  be  deducted  and 
withheld  from  coupons,  checks,  or  bills  of  exchange  for 
or  in  payment  of  interest  upon  bonds  of  foreign  countries 
and  upon  foreign  mortgages  or  like  obligations  (not  pay- 
able in  the  United  States),  and  also  from  coupons,  checks, 
or  bills  of  exchange  for  or  in  payment  of  any  dividends 
upon  the  stock  or  interest  upon  the  obligations  of  foreign 
corporations,  associations,  and  insurance  companies  engaged 

35 


ANALYSIS   AND   INTERPRETATION    OF 

in  business  in  foreign  countries;  and  the  tax  in  each  case 
shall  be  withheld  and  deducted  for  and  in  behalf  of  any 
person  subject  to  the  tax  hereinbefore  imposed,  although 
such  interest,  dividends,  or  other  compensation  does  not 
exceed  $3,000,  by  any  banker  or  person  who  shall  sell  or 
otherwise  realize  coupons,  checks,  or  bills  of  exchange 
drawn  or  made  in  payment  of  any  such  interest  or  divi- 
dends (not  payable  in  the  United  States),  and  any  person 
who  shall  obtain  payment  (not  in  the  United  States),  in 
behalf  of  another  of  such  dividends  and  interest  by  means 
of  coupons,  checks,  or  bills  of  exchange,  and  also  any 
dealer  in  such  coupons  who  shall  purchase  the  same  for  any 
such  dividends  or  interest  (not  payable  in  the  United 
States),  otherwise  than  from  a  banker  or  another  dealer 
in  such  coupons;  but  in  each  case  the  benefit  of  the  ex- 
emption and  the  deduction  allowable  under  this  section  may 
be  had  by  complying  with  the  foregoing  provisions  of  this 
paragraph. 

All  persons,  firms,  or  corporations  undertaking  as  a 
matter  of  business  or  for  profit  the  collection  of  foreign 
payments  of  such  interest  or  dividends  by  means  of  cou- 
pons, checks,  or  bills  of  exchange  shall  obtain  a  license 
from  the  Commissioner  of  Internal  Revenue,  and  shall  be 
subject  to  such  regulations  enabling  the  Government  to 
ascertain  and  verify  the  due  withholding  and  payment  of 
the  income  tax  required  to  be  withheld  and  paid  as  the 
Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  shall  prescribe;  and  any 
person  who  shall  knowingly  undertake  to  collect  such  pay- 
ments as  aforesaid  without  having  obtained  a  license  there- 
for, or  without  complying  with  such  regulations,  shall  be 
deemed  guilty  of  a  misdemeanor  and  for  each  offense  be 
fined  in  a  sum  not  exceeding  $5,000,  or  imprisoned  for  a 
term  not  exceeding  one  year,  or  both,  in  the  discretion  of 
the  court. 

Nothing  in  this  section  shall  be  construed  to  release  a 
taxable  person  from  liability  for  income  tax,  nor  shall  any 
contract  entered  into  after  this  Act  takes  effect  be  valid  in 
regard  to  any  Federal  income  tax  imposed  upon  a  person 
liable  to  such  payment. 

36 


THE     FEDERAL     INCOME     TAX     LAW 

The  tax  herein  imposed  upon  annual  gains,  profits,  and 
income  not  falh'ng  under  the  foregoing  and  not  returned 
and  paid  by  virtue  of  the  foregoing  shall  be  assessed  by 
personal  return  under  rules  and  regulations  to  be  prescribed 
by  the  Commissioner  of  Internal  Revenue  and  approved  by 
the  Secretary  of  the  Treasury. 

The  provisions  of  this  section  relating  to  the  deduction 
and  payment  of  the  tax  at  the  source  of  income  shall  only 
apply  to  the  normal  tax  hereinbefore  imposed  upon  indi- 
viduals. 

F.  That  if  any  person,  corporation,  joint-stock  com- 
pany, association,  or  insurance  company  liable  to  make  the 
return  or  pay  the  tax  aforesaid  shall  refuse  or  neglect  to 
make  a  return  at  the  time  or  times  hereinbefore  specified 
in  each  year,  such  person  shall  be  liable  to  a  penalty  of  not 
less  than  $20  nor  more  than  $1,000.  Any  person  or  any 
ofiicer  of  any  corporation  required  by  law  to  make,  render, 
sign,  or  verify  any  return  who  makes  any  false  or  fraudu- 
lent return  or  statement  with  intent  to  defeat  or  evade  the 
assessment  required  by  this  section  to  be  made  shall  be 
guilty  of  a  misdemeanor,  and  shall  be  fined  not  exceeding 
$2,000  or  be  imprisoned  not  exceeding  one  year,  or  both, 
at  the  discretion  of  the  court,  with  the  costs  of  prosecution. 

G.  (a)  That  the  normal  tax  hereinbefore  imposed  upon 
individuals  likewise  shall  be  levied,  assessed,  and  paid  an- 
nually upon  the  entire  net  income  arising  or  accruing  from 
all  sources  during  the  preceding  calendar  year  to  every  cor- 
poration, joint-stock  company  or  association,  and  every  in- 
surance company,  organized  in  the  United  States,  no 
matter  how  created  or  organized,  not  including  partner- 
ships; but  if  organized,  authorized,  or  existing  under  the 
laws  of  any  foreign  country,  then  upon  the  amount  of  net 
income  accruing  from  business  transacted  and  capital  in- 
vested within  the  United  States  during  such  year:  Pro- 
vided, however,  That  nothing  in  this  section  shall  apply  to 
labor,  agricultural,  or  horticultural  organizations,  or  to 
mutual  savings  banks  not  having  a  capital  stock  represented 
by  shares,  or  to  fraternal  beneficiary  societies,  orders,  or 
associations  operating  under  the  lodge  system  or  for  the 
exclusive  benefit  of  the  members  of  a  fraternity  itself  oper- 

37 


ANALYSIS  AND   INTERPRETATION    OF 


ating  under  the  lodge  system,  and  providing  for  the  pay- 
ment of  hfe,  sick,  accident,  and  other  benefits  to  the  mem- 
bers of  such  societies,  orders,  or  associations  and  depend- 
ents of  such  members,  nor  to  domestic  building  and  loan 
associations,  nor  to  cemetery  companies,  organized  and 
operated  exclusively  for  the  mutual  benefit  of  their  mem- 
bers, nor  to  any  corporation  or  association  organized  and 
operated  exclusively  for  religious,  charitable,  scientific,  or 
educational  purposes,  no  part  of  the  net  income  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  indi- 
vidual, nor  to  business  leagues,  nor  to  chambers  of  com- 
merce or  boards  of  trade,  not  organized  for  profit  or  no 
part  of  the  net  income  of  which  inures  to  the  benefit  of  the 
private  stockholder  or  individual;  nor  to  any  civic  league 
or  organization  not  organized  for  profit,  but  operated  ex- 
clusively for  the  promotion  of  social  welfare:  Provided 
further.  That  there  shall  not  be  taxed  under  this  section 
any  income  derived  from  any  public  utility  or  from  the 
exercise  of  any  essential  governmental  function  accruing 
to  any  State,  Territory,  or  the  District  of  Columbia,  or  any 
political  subdivision  of  a  State,  Territory,  or  the  District 
of  Columbia,  nor  any  income  accruing  to  the  government 
of  the  Philippine  Islands  or  Porto  Rico,  or  of  any  political 
subdivision  of  the  Philippine  Islands  or  Porto  Rico:  Pro- 
vided, That  whenever  any  State,  Territory,  or  the  District 
of  Columbia,  or  any  political  subdivision  of  a  State  or 
Territory,  has,  prior  to  the  passage  of  this  Act,  entered  in 
good  faith  into  a  contract  with  any  person  or  corporation, 
the  object  and  purpose  of  which  is  to  acquire,  construct, 
operate  or  maintain  a  pubHc  utiHty,  no  tax  shall  be  levied 
under  the  provisions  of  this  Act  upon  the  income  derived 
from  the  operation  of  such  public  utiHty,  so  far  as  the  pay- 
ment thereof  will  impose  a  loss  or  burden  upon  such  State, 
Territory,  or  the  District  of  Columbia,  or  a  political  sub- 
division of  a  State  or  Territory;  but  this  provision  is  not 
intended  to  confer  upon  such  person  or  corporation  any 
financial  gain  or  exemption  or  to  relieve  such  person  or 
corporation  from  the  payment  of  a  tax  as  provided  for  in 
this  section  upon  the  part  or  portion  of  the  said  income  to 

38 


THE     FEDERAL     INCOME     TAX     LAW 


which  such  person  or  corporation  shall  be  entitled  under 
such  contract. 

(b)  Such  net  income  shall  be  ascertained  by  deducting 
from  the  gross  amount  of  the  income  of  such  corporation, 
joint-stock  company  or  association,  or  insurance  company, 
received  within  the  year  from  all  sources,  (first)  all  the 
ordinary  and  necessary  expenses  paid  within  the  year  in 
the  maintenance  and  operation  of  its  business  and  prop- 
erties, including  rentals  or  other  payments  required  to  be 
made  as  a  condition  to  the  continued  use  or  possession  of 
property;  (second)  all  losses  actually  sustained  within  the 
year  and  not  compensated  by  insurance  or  otherwise,  in- 
cluding a  reasonable  allowance  for  depreciation  by  use, 
wear  and  tear  of  property,  if  any;  and  in  the  case  of  mines 
a  reasonable  allowance  for  depletion  of  ores  and  all  other 
natural  deposits,  not  to  exceed  5  per  centum  of  the  gross 
value  at  the  mine  of  the  output  for  the  year  for  which  the 
computation  is  made;  and  in  case  of  insurance  companies 
the  net  addition,  if  any,  required  by  law  to  be  made  within 
the  year  to  reserve  funds  and  the  sums  other  than  dividends 
paid  within  the  year  on  policy  and  annuity  contracts:  Pro- 
vided, That  mutual  fire  insurance  companies  requiring  their 
members  to  make  premium  deposits  to  provide  for  losses 
and  expenses  shall  not  return  as  income  any  portion  of  the 
premium  deposits  returned  to  their  policyholders,  but  shall 
return  as  taxable  income  all  income  received  by  them  from 
all  other  sources  plus  such  portions  of  the  premium  de- 
posits as  are  retained  by  the  companies  for  purposes  other 
than  the  payment  of  losses  and  expenses  and  reinsurance 
reserves :  Provided  further,  That  mutual  marine  insurance 
companies  shall  include  in  their  return  of  gross  income 
gross  premiums  collected  and  received  by  them  less  amounts 
paid  for  reinsurance,  but  shall  be  entitled  to  include  in  de- 
ductions from  gross  income  amounts  repaid  to  policy- 
holders on  account  of  premiums  previously  paid  by  them 
and  interest  paid  upon  such  amounts  between  the  ascer- 
tainment thereof  and  the  payment  thereof  and  life  insur- 
ance companies  shall  not  include  as  income  in  any  year 
such  portion  of  any  actual  premium  received  from  any  in- 
dividual  policyholder    as    shall    have    been    paid    back    or 

39 


ANALYSIS  AND   INTERPRETATION    OF 

credited  to  such  individual  policyholder,  or  treated  as  an 
abatement  of  premium  of  such  individual  policyholder, 
within  such  year;  (third)  the  amount  of^terest  accrued 
and  paid  within  the  year  on  its  indebtedness  to  an  amount 
of  such  indebtedness  not  exceeding  one-half  of  the  sum  of 
its  interest  bearing  indebtedness  and  its  paid-up  capital 
stock  outstanding  at  the  close  of  the  year,  or  if  no  capital 
stock,  the  amount  of  interest  paid  within  the  year  on  an 
amount  of  its  indebtedness  not  exceeding  the  amount  of 
capital  employed  in  the  business  at  the  close  of  the  year: 
Provided,  That  in  case  of  indebtedness  wholly  secured  by 
collateral  the  subject  of  sale  in  ordinary  business  of  such 
corporation,  joint-stock  company,  or  association,  the  total 
interest  secured  and  paid  by  such  company,  corporation,  or 
association  within  the  year  on  any  such  indebtedness  may 
be  deducted  as  a  part  of  its  expense  of  doing  business: 
Provided  further,  That  in  the  case  of  bonds  or  other  in- 
debtedness, which  have  been  issued  with  a  guaranty  that 
the  interest  payable  thereon  shall  be  free  from  taxation,  no 
deduction  for  the  payment  of  the  tax  herein  imposed  shall 
be  allowed;  and  in  the  case  of  a  bank,  banking  association, 
loan,  or  trust  company,  interest  paid  within  the  year  on 
deposits  or  on  moneys  received  for  .investment  and  secured 
by  interest-bearing  certificates  of  indebtedness  issued  by 
such  bank,  banking  association,  loan  or  trust  company; 
(fourth)  all  sums  paid  by  it  within  the  year  for  taxes  im- 
posed under  the  authority  of  the  United  States  or  of  any 
State  or  Territory  thereof,  or  imposed  by  the  Government 
of  any  foreign  country:  Provided,  That  in  the  case  of  a 
corporation,  joint-stock  company  or  association,  or  insur- 
ance company,  organized,  authorized,  or  existing  under  the 
laws  of  any  foreign  country,  such  net  income  shall  be  as- 
certained by  deducting  from  the  gross  amount  of  its  in- 
come accrued  within  the  year  from  business  transacted  and 
capital  invested  within  the  United  States,  (first)  all  the 
ordinary  and  necessary  expenses  actually  paid  within  the 
year  out  of  earnings  in  the  maintenance  and  operation  of 
its  business  and  property  within  the  United  States,  m- 
cluding  rentals  or  other  payments  required  to  be  made  as 
a  condition  to  the  continued  use  or  possession  of  property; 

40 


THE     FEDERAL     INCOME     TAX     LAW 

(second)  all  losses  actually  sustained  within  the  3^ear  in 
business  conducted  by  it  within  the  United  States  and  not 
compensated  by  ij^urance  or  otherwise,  including  a  reason- 
able allowance  for  depreciation  by  use,  wear  and  tear  of 
property,  if  any,  and  in  the  case  of  mines  a  reasonable  al- 
lowance for  depletion  of  ores  and  all  other  natural  deposits, 
not  to  exceed  5  per  centum  of  the  gross  value  at  the  mine 
of  the  output  for  the  year  for  which  the  computation  is 
made;  and  in  case  of  insurance  companies  the  net  addition, 
if  any,  required  by  law  to  be  made  within  the  year  to  re- 
serve funds  and  the  sums  other  than  dividends  paid  within 
the  year  on  policy  and  annuity  contracts :  Provided  further, 
That  mutual  life  insurance  companies  requiring  their  mem- 
bers to  make  premium  deposits  to  provide  for  losses  and 
expenses  shall  not  return  as  income  any  portion  of  the 
premium  deposits  returned  to  their  policyholders,  but  shall 
return  as  taxable  income  all  income  received  by  them  from 
all  other  sources  plus  such  portions  of  the  premium  deposits 
as  are  retained  by  the  companies  for  purposes  other  than 
the  payment  of  losses  and  expenses  and  reinsurance  re- 
serves: Provided  further,  That  mutual  marine  insurance 
companies  shall  include  in  their  return  of  gross  income 
gross  premiums  collected  and  received  by  them  less  amounts 
paid  for  reinsurance,  but  shall  be  entitled  to  include  in  de- 
ductions from  gross  income  amounts  repaid  to  policyholders 
on  account  of  premiums  previously  paid  by  them,  and  in- 
terest paid  upon  such  amounts  between  the  ascertainment 
thereof  and  the  payment  thereof  and  life  insurance  com- 
panies shall  not  include  as  income  in  any  year  such  portion 
of  any  actual  premium  received  from  any  individual  policy- 
holder as  shall  have  been  paid  back  or  credited  to  such  in- 
dividual policyholder,  or  treated  as  an  abatement  of  pre- 
mium of  such  individual  policyholder,  within  such  year; 
(third)  the  amount  of  interest  accrued  and  paid  within  the 
year  on  its  indebtedness  to  an  amount  of  such  indebtedness 
not  exceeding  the  proportion  of  one-half  of  the  sum  of  its 
interest  bearing  indebtedness  and  its  paid-up  capital  stock 
outstanding  at  the  close  of  the  year,  or  if  no  capital  stock, 
the  capital  em'ployed  in  the  business  at  the  close  of  the  year 
which  the  gross  amount  of  its  income  for  the  year  from 

41 


ANALYSIS  AND   INTERPRETATION    OF 

business  transacted  and  capital  invested  within  the  United 
States  bears  to  the  gross  amount  of  its  income  derived 
from  all  sources  within  and  without  the  United  States: 
Provided,  That  in  the  case  of  bonds  or^other  indebtedness 
which  have  been  issued  with  a  guaranty  that  the  interest 
payable  thereon  shall  be  free  from  taxation,  no  deduction 
for  the  payment  of  the  tax  herein  imposed  shall  be  allowed ; 
(fourth}  all  sums  paid  by  it  within  the  year  for  taxes  im- 
posed under  the  authority  of  the  United  States  or  of  any 
State  of  Territory  thereof  or  the  District  of  Columbia.  In 
the  case  of  assessment  insurance  companies,  whether  do- 
mestic or  foreign,  the  actual  deposit  of  sums  with  State  or 
Territorial  officers,  pursuant  to  law,  as  additions  to  guar- 
antee or  reserve  funds  shall  be  treated  as  being  payments 
required  by  law  to  reserve  funds. 

(c)  The  tax  herein  imposed  shall  be  computed  upon  its 
entire  net  income  accrued  within  each  preceding  calendar 
year  ending  December  thirty-first :  Provided,  hozuever.  That 
for  the  year  ending  December  thirty-first,  nineteen  hun- 
dred and  thirteen,  said  tax  shall  be  imposed  upon  its  en- 
tire net  income  accrued  within  that  portion  of  said  year 
from  March  first  to  December  thirty-first,  both  dates  in- 
clusive, to  be  ascertained  by  taking  five-sixths  of  its  entire 
net  income  for  said  calendar  year:  Provided  further,  That 
any  corporation,  joint-stock  company  or  association,  or  in- 
surance company  subject  to  this  tax  may  designate  the  last 
day  of  any  month  in  the  year  as  the  day  of  the  closing  of 
its  fiscal  year  and  shall  be  entitled  to  have  the  tax  payable 
by  it  computed  upon  the  basis  of  the  net  income  ascertained 
as  herein  provided  for  the  year  ending  on  the  day  so  des- 
ignated in  the  year  preceding  the  date  of  assessment  in- 
stead of  upon  the  basis  of  the  net  income  for  the  calendar 
year  preceding  the  date  of  assessment;  and  it  shall  give 
notice  of  the  day  it  has  thus  designated  as  the  closing  of 
its  fiscal  year  to  the  collector  of  the  district  in  which  its 
principal  business  office  is  located  at  any  time  not  less  than 
thirty  days  prior  to  the  date  upon  which  its  annual  return 
shall  be  filed.  All  corporations,  joint-stock  companies  or 
associations,  and  insurance  companies  subject  to  the  tax 
herein  imposed,  computing  taxes  upon  the  income  of  the 

42 


THE     FEDERAL     INCOME     TAX     LAW 


calendar  year,  shall,  on  or  before  the  first  day  of  March, 
nineteen  hundred  and  fourteen,  and  the  first  day  of  March 
in  each  year  thereafter,  and  all  corporations,  joint-stock 
companies  or  associations,  and  insurance  companies,  com- 
puting taxes  upon  the  income  of  a  fiscal  year  which  it  may 
designate  in  the  manner  hereinbefore  provided,  shall  render 
a  like  return  within  sixty  days  after  the  close  of  its  said 
fiscal  year,  and  within  sixty  days  after  the  close  of  its 
fiscal  year  in  each  year  thereafter,  or  in  the  case  of  a  cor- 
poration, joint-stock  company  or  association,  or  insurance 
company,  organized  or  existing  under  the  laws  of  a  for- 
eign country,  in  the  place  where  its  principal  business  is 
located  within  the  United  States,  in  such  form  as  the  Com- 
missioner of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  shall  prescribe,  shall  render  a 
true  and  accurate  return  under  oath  or  affirmation  of  its 
president,  vice  president,  or  other  principal  officer,  and  its 
treasurer  or  assistant  treasurer,  to  the  collector  of  internal 
revenue  for  the  district  in  which  it  has  its  principal  place 
of  business,  setting  forth  (first)  the  total  amount  of  its 
paid-up  capital  stock  outstanding,  or  if  no  capital  stock, 
its  capital  employed  in  business,  at  the  close  of  the  year; 
(second)  the  total  amount  of  its  bonded  and  other  in- 
debtedness at  the  close  of  the  year;  (third)  the  gross 
amount  of  its  income,  received  during  such  year  from  all 
sources,  and  if  organized  under  the  laws  of  a  foreign 
country  the  gross  amount  of  its  income  received  within 
the  year  from  business  transacted  and  capital  invested 
within  the  United  States;  (fourth)  the  total  amount  of  all 
its  ordinary  and  necessary  expenses  paid  out  of  earnings 
in  the  maintenance  and  operation  of  the  business  and  prop- 
erties of  such  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company  within  the  year,  stating  sep- 
arately all  rentals  or  other  payments  required  to  be  made 
as  a  condition  to  the  continued  use  or  possession  of  prop- 
erty, and  if  organized  under  the  laws  of  a  foreign  country 
the  amount  so  paid  in  the  maintenance  and  operation  of 
its  business  within  the  United  States;  (fifth)  the  total 
amount  of  all  losses  actually  sustained  during  the  year 
and  not  compensated  by  insurance  or  otherwise,   stating 

43 


ANALYSIS  AND   INTERPRETATION    OF 

separately  any  amounts  allowed  for  depreciation  of  prop- 
erty, and  in  case  of  insurance  companies  the  net  addition, 
if  any,  required  by  law  to  be  made  within  the  year  to  re- 
serve funds  and  the  sums  other  than  dividends  paid  within 
the  year  on  policy  and  annuity  contracts :  Provided  further^ 
That  mutual  fire  insurance  companies  requiring  their  mem- 
bers to  make  premium  deposits  to  provide  for  losses  and 
expenses  shall  not  return  as  income  any  portion  of  the 
premium  deposits  returned  to  their  policyholders,  but  shall 
return  as  taxable  income  all  income  received  by  them  from 
all  other  sources  plus  such  portions  of  the  premium  de- 
posits as  are  retained  by  the  companies  for  purposes  other 
than  the  payment  of  losses  and  expenses  and  reinsurance 
reserves:  Provided  further,  That  mutual  marine  insurance 
companies  shall  include  in  their  return  of  gross  income 
gross  premiums  collected  and  received  by  them  less  amounts 
paid  for  reinsurance,  but  shall  be  entitled  to  include  in  de- 
dux:tions  from  gross  income  amounts  repaid  to  policy- 
holders on  account  of  premiums  previously  paid  by  them, 
and  interest  paid  upon  such  amounts  between  the  ascer- 
tainment thereof  and  the  payment  thereof  and  life  insur- 
ance companies  shall  not  include  as  income  in  any  year 
such  portion  of  any  actual  premium  received  from  any 
individual  policyholder  as  shall  have  been  paid  back  or 
credited  to  such  individual  policyholder,  or  treated  as  an 
abatement  of  premium  of  such  individual  policyholder, 
within  such  year;  and  in  case  of  a  corporation,  joint- 
stock  company  or  association,  or  insurance  company,  or- 
ganized under  the  laws  of  a  foreign  country,  all  losses 
actually  sustained  by  it  during  the  year  in  business  con- 
ducted by  it  within  the  United  States,  not  compensated  by 
insurance  or  otherwise,  stating  separately  any  amounts 
allowed  for  depreciation  of  property,  and  in  case  of  in- 
surance companies  the  net  addition,  if  any,  required  by 
law  to  be  made  within  the  year  to  reserve  funds  and  the 
sums  other  than  dividends  paid  within  the  year  on  policy 
and  annuity  contracts:  Provided  further,  That  mutual  fire 
insurance  companies  requiring  their  members  to  make 
premium  deposits  to  provide  for  losses  and  expenses  shall 
not  return  as  income  any  portion  of  the  premium  deposits 

44 


THE     FEDERAL     INCOME     TAX     LAW 


returned  to  their  policyholders,  but  shall  return  as  taxable 
income  all  income  received  by  them  from  all  other  sources 
plus  such  portions  of  the  premium  deposits  as  are  retained 
by  the  companies  for  purposes  other  than  the  payment  of 
losses  and  expenses  and  reinsurance  reserves:  Provided 
further,  That  mutual  marine  insurance  companies  shall  in- 
clude in  their  return  of  gross  income  gross  premiums  col- 
lected and  received  by  them  less  amounts  paid  for  rein- 
surance, but  shall  be  entitled  to  include  in  deductions  from 
gross  income  amounts  repaid  to  policyholders  on  account 
of  premiums  previously  paid  by  them  and  interest  paid 
upon  such  amounts  between, the  ascertainment  thereof  and 
the  payment  thereof  and  life  insurance  companies  shall  not 
include  as  income  in  any  year  such  portion  of  any  actual 
premium  received  from  any  individual  policyholder 
as  shall  have  been  paid  back  or  credited  to  such 
individual  policyholder,  or  treated  as  an  abatement 
or  premium  of  such  individual  policyholder,  within 
such  year;  (sixth)  the  amount  of  interest  accrued 
and  paid  within  the  year  on  its  bonded  or  other 
indebtedness  not  exceeding  one-half  of  the  sum  of 
its  interest  bearing  indebtedness  and  its  paid-up  capital 
stock,  outstanding  at  the  close  of  the  year,  or  if  no  capital 
stock,  the  amount  of  interest  paid  within  the  year  on  an 
amount  of  indebtedness  not  exceeding  the  amount  of  cap- 
ital einployed  in  the  business  at  the  close  of  the  year,  and 
in  the  case  of  a  bank,  banking  association,  or  trust  com- 
pany, stating  separately  all  interest  paid  by  it  within  the 
year  on  deposits;  or  in  the  case  of  a  corporation,  joint- 
stock  company  or  association,  or  insurance  company,  or- 
ganized under  the  laws  of  a  foreign  country,  interest  so 
paid  on  its  bonded  or  other  indebtedness  to  an  amount  of 
such  bonded  or  other  indebtedness  not  exceeding  the  pro- 
portion of  its  paid-up  capital  stock  outstanding  at  the  close 
of  the  year,  or  if  no  capital  stock,  the  amount  of  capital 
employed  in  the  business  at  the  close  of  the  year,  which 
the  gross  amount  of  its  income  for  the  year  from  business 
transacted  and  capital  invested  within  the  United  States 
bears  to  the  gross  amount  of  its  income  derived  from  all 
sources  within  and  without  the  United  States;   (seventh) 

45 


ANALYSIS  AND   INTERPRETATION    OF 

the  amount  paid  by  it  within  the  year  for  taxes  imposed 
under  the  authority  of  the  United  States  and  separately 
the  amount  so  paid  by  it  for  taxes  imposed  by  the  Govern- 
ment of  any  foreign  country;  (eighth)  the  net  income  of 
such  corporation,  joint-stock  company  or  association,  or 
insurance  company,  after  making  the  deductions  in  this 
subsection  authorized.  x\ll  such  returns  shall  as  received 
be  transmitted  forthwith  by  the  collector  to  the  Commis- 
sioner of  Internal  Revenue. 

All  assessments  shall  be  made  and  the  several  corpora- 
tions, joint-stock  companies  or  associations,  and  insurance 
companies  shall  be  notified  of  the  amount  for  which  they 
are  respectively  liable  on  or  before  the  first  day  of  June 
of  each  successive  year,  and  said  assessment  shall  be  paid 
on  or  before  the  thirtieth  day  of  June:  Provided^  That 
every  corporation,  joint-stock  company  or  association,  and 
insurance  company,  computing  taxes  upon  the  income  of 
the  fiscal  year  which  it  may  designate  in  the  manner  here- 
inbefore provided,  shall  pay  the  taxes  due  under  its  assess- 
ment within  one  hundred  and  twenty  days  after  the  date 
upon  which  it  is  required  to  file  its  Hst  or  return  of  in- 
come for  assessment;  except  in  cases  of  refusal  or  neglect 
to  make  such  return,  and  in  cases  of  false  or  fraudulent 
returns,  in  which  cases  the  Commissioner  of  Internal 
Revenue  shall,  upon  the  discovery  thereof,  at  any  time 
within  three  years  after  said  return  is  due,  make  a  return 
upon  information  obtained  as  provided  for  in  this  section 
or  by  existing  law,  and  the  assessment  made  by  the  Com- 
missioner of  Internal  Revenue  thereon  shall  be  paid  by 
such  corporation,  joint-stock  company  or  association,  or 
insurance  company  immediately  upon  notification  of  the 
amount  of  such  assessment;  and  to  anj-  sum  or  sums  due 
and  unpaid  after  the  thirtieth  day  of  June  in  any  year,  or 
after  one  hundred  and  twenty  days  from  the  date  on  which 
the  return  of  income  is  required  to  be  made  by  the  tax- 
payer, and  after  ten  days  notice  and  demand  thereof  by  the 
collector,  there  shall  be  added  the  sum  of  5  per  centum  on 
the  amount  of  the  tax  unpaid  and  interest  at  the  rate  of  1 
per  centum  per  month  upon  said  tax  from  the  time  the 
same  becomes  due. 

46 


THE     FEDERAL     INCOME     TAX     LAW 

(d)  When  the  assessment  shall  be  made,  as  provided  in 
this  section,  the  returns,  together  with  any  corrections 
thereof  which  may  have  been  made  by  the  commissioner, 
shall  be  filed  in  the  office  of  the  Commissioner  of  Internal 
Revenue  and  shall  constitute  public  records  and  be  open  to 
inspection  as  such :  Provided,  That  any  and  all  such  returns 
shall  be  open  to  inspection  only  upon  the  order  of  the 
President,  under  rules  and  regulations  to  be  prescribed  by 
the  Secretary  of  the  Treasury  and  approved  by  the  Presi- 
dent: Provided  further,  That  the  proper  officers  of  any 
State  imposing  a  general  income  tax  may,  upon  the  re- 
quest of  the  governor  thereof,  have  access  to  said  returns 
or  to  an  abstract  thereof,  showing  the  name  and  income 
of  each  such  corporation,  joint-stock  company,  association 
or  insurance  company,  at  such  times  and  in  such  manner 
as  the  Secretary  of  the  Treasury  may  prescribe. 

If  any  of  the  corporations,  joint- stock  companies  or  as- 
sociations, or  insurance  companies  aforesaid,  shall  refuse 
or  neglect  to  make  a  return  at  the  time  or  times  herein- 
before specified  in  each  year,  or  shall  render  a  false  or 
fraudulent  return,  such  corporation,  joint-stock  company  or 
association,  or  insurance  company  shall  be  liable  to  a  pen- 
alty of  not  exceeding  $10,000. 

H.  That  the  word  "State"  or  "United  States"  when  used 
in  this  section  shall  be  construed  to  include  any  Territory, 
Alaska,  the  District  of  Columbia,  Porto  Rico,  and  the  Phil- 
ippine Islands,  when  such  construction  is  necessary  to  carry 
out  its  provisions. 

I.  That  sections  thirty-one  hundred  and  sixty-seven, 
thirty-one  hundred  and  seventy-two,  thirty-one  hundred  and 
seventy-three,  and  thirty-one  hundred  and  seventy-six  of 
the  Revised  Statutes  of  the  United  States  as  amended  are 
hereby  amended  so  as  to  read  as  follows : 

"Sec.  3167.  It  shall  be  unlawful  for  any  collector,  dep- 
uty collector,  agent,  clerk,  or  other  officer  or  employee  of 
the  United  States  to  divulge  or  to  make  known  in  any 
manner  whatever  not  provided  by  law  to  any  person  the 
operations,  style  of  work,  or  apparatus  of  any  manufac- 
turer or  producer  visited  by  him  in  the  discharge  of  his 
official  duties,  or  the  amount  or  source  of  income,  profits, 

47 


ANALYSIS  AND   INTERPRETATION    OF 


losses,  expenditures,  or  any  particular  thereof,  set  forth  or 
disclosed  in  any  income  return  by  any  person  or  corpora- 
tion, or  to  permit  any  income  return  or  copy  thereof  or  any 
book  containing  any  abstract  or  particulars  thereof  to  be 
seen  or  examined  by  any  person  except  as  provided  by  law ; 
and  it  shall  be  unlawful  for  any  person  to  print  or  publish 
in  any  manner  whatever  not  provided  by  law  any  income 
return  or  any  part  thereof  or  the  amount  or  source  of  in- 
come, profits,  losses,  or  expenditures  appearing  in  any  in- 
come return;  and  any  offense  against  the  foregoing  pro- 
vision shall  be  a  misdemeanor  and  be  punished  by  a  fine 
not  exceeding  $1,000  or  by  imprisonment  not  exceeding 
one  year,  or  both,  at  the  discretion  of  the  court;  and  if  the 
offender  be  an  officer  or  employee  of  the  United  States  he 
shall  be  dismissed  from  office  and  be  incapable  thereafter 
of  holding  any  office  under  the  Government. 

''Sec.  3172.  Every  collector  shall,  from  time  to  time, 
cause  his  deputies  to  proceed  through  every  part  of  his  dis- 
trict and  inquire  after  and  concerning  all  persons  therein 
who  are  liable  to  pay  any  internal-revenue  tax,  and  all 
persons  owning  or  having  the  care  and  management  of  any 
objects  liable  to  pay  any  tax,  and  to  make  a  list  of  such  per- 
sons and  enumerate  said  objects. 

"Sec.  3173.  It  shall  be  the  duty  of  any  person,  partner- 
ship, firm,  association,  or  corporation,  made  liable  to  any 
duty,  special  tax,  or  other  tax  imposed  by  law,  when  not 
otherwise  provided  for,  in  case  of  a  special  tax,  on  or  be- 
fore the  thirty-first  day  of  July  in  each  year,  in  case  of  in- 
come tax  on  or  before  the  first  day  of  March  in  each  year, 
and  in  other  cases  before  the  day  on  which  the  taxes  accrue, 
to  make  a  list  of  return,  verified  by  oath  or  affirmation,  to 
the  collector  or  a  deputy  collector  of  the  district  where  lo- 
cated, of  the  articles  or  objects,  including  the  amount  of 
annual  income  charged  with  a  duty  or  tax,  the  quantity  of 
goods,  wares,  and  merchandise  made  or  sold  and  charged 
with  a  tax,  the  several  rates  and  aggregate  amount,  ac- 
cording to  the  forms  and  regulations  to  be  prescribed  by 
the  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  for  which  such  person, 
partnership,  firm,  association,  or  corporation  is  liable :  Pro- 

48 


THE     FEDERAL     INCOME     TAX     LAW 

vided,  That  if  any  person  liable  to  pay  any  duty  or  tax,  or 
owning,  possessing,  or  having  the  care  or  management  of 
property,  goods,  wares,  and  merchandise,  articles  or  ob- 
jects liable  to  pay  any  duty,  tax,  or  license,  shall  fail  to 
make  and  exhibit  a  list  or  return  required  by  law,  but  shall 
consent  to  disclose  the  particulars  of  any  and  all  the  prop- 
erty, goods,  wares,  and  merchandise,  articles,  and  objects 
liable  to  pay  any  duty  or  tax,  or  any  business  or  occupa- 
tion liable  to  pay  any  tax  as  aforesaid  then  and  in  that  case 
it  shall  be  the  duty  of  the  collector  or  deputy  collector  to 
make  such  list  or  return,  which,  being  distinctly  read,  con- 
sented to,  and  signed  and  verified  by  oath  or  affirmation  by 
the  person  so  owning,  possessing,  or  having  the  care  and 
management  as  aforesaid,  may  be  received  as  the  list  of 
such  person:  Provided  further,  That  in  case  no  annual  list 
or  return  has  been  rendered  by  such  person  to  the  collector 
or  deputy  collector  as  required  by  law,  and  the  person  shall 
be  absent  from  his  or  her  residence  or  place  of  business  at 
the  time  the  collector  or  a  deputy  collector  shall  call  for 
the  annual  list  or  return,  it  shall  be  the  duty  of  such  col- 
lector or  deputy  collector  to  leave  at  such  place  of  residence 
or  business,  with  some  one  of  suitable  age  and  discretion, 
if  such  be  present,  otherwise  to  deposit  in  the  nearest  post 
office,  a  note  or  memorandum  addressed  to  such  person, 
requiring  him  or  her  to  render  to  such  collector  or  deputy 
collector  the  list  or  return  required  by  law  within  ten  days 
from  the  date  of  such  note  or  memorandum,  verified  by 
oath  or  affirmation.  And  if  any  person,  on  being  notified 
or  required  as  aforesaid,  shall  refuse  or  neglect  to  render 
such  list  or  return  within  the  time  required  as  aforesaid, 
or  whenever  any  person  who  is  required  to  deliver  a 
monthly  or  other  return  of  objects  subject  to  tax  fails  to 
do  so  at  the  time  required,  or  delivers  any  return  which, 
in  the  opinion  of  the  collector,  is  false  or  fraudulent,  or 
contains  any  undervaluation  or  understatement,  it  shall  be 
lawful  for  the  collector  to  summon  such  person,  or  any 
other  person  having  possession,  custody,  or  care  of  books 
of  account  containing  entries  relating  to  the  business  of 
such  person,  or  any  other  person  he  may  deem  proper,  to 
appear  before  him  and  produce  such  books,  at  a  time  and 

49 


ANALYSIS  AND   INTERPRETATION    OF 

place  named  in  the  summons,  and  to  give  testimony  or 
answer  interrogatories,  under  oath,  respecting  any  objects 
liable  to  tax  or  the  returns  thereof.  The  collector  may 
summon  any  person  residing  or  found  within  the  State  in 
which  his  district  lies;  and  when  the  person  intended  to  be 
summoned  does  not  reside  and  can  not  be  found  within 
such  State,  he  may  enter  any  collection  district  where  such 
person  may  be  found  and  there  make  the  examination 
herein  authorized.  And  to  this  end  he  may  there  exercise 
all  the  authority  which  he  might  lawfully  exercise  in  the 
district  for  which  he  was  commissioned. 

''Sec.  3176.  When  any  person,  corporation,  company,  or 
association  refuses  or  neglects  to  render  any  return  or  list 
required  by  law,  or  renders  a  false  or  fraudulent  return  or 
list,  the  collector  or  any  deputy  collector  shall  make,  ac- 
cording to  the  best  information  which  he  can  obtain,  in- 
cluding that  derived  from  the  evidence  elicited  by  the  ex- 
amination of  the  collector,  and  on  his  own  view  and  in- 
formation, such  list  or  return,  according  to  the  form  pre- 
scribed, of  the  income,  property,  and  objects  liable  to  tax 
owned  or  possessed  or  under  the  care  or  management  of 
such  person  or  corporation,  company  or  association,  and 
the  Commissioner  of  Internal  Revenue  shall  assess  all  taxes 
not  paid  by  stamps,  including  the  amount,  if  any,  due  for 
special  tax,  income  or  other  tax,  and  in  case  of  any  return 
of  a  false  or  fraudulent  list  or  valuation  intentionally  he 
shall  add  100  per  centum  to  such  tax;  and  in  case  of  a  re- 
fusal or  neglect,  except  in  cases  of  sickness  or  absence,  to 
make  a  list  or  return,  or  to  verify  the  same  as  aforesaid, 
he  shall  add  50  per  centum  to  such  tax.  In  case  of  neglect 
occasioned' by  sickness  or  absence  as  aforesaid  the  collector 
may  allow  such  further  time  for  making  and  delivering 
such  list  or  return  as  he  may  deem  necessary,  not  exceeding 
thirty  days.  The  amount  so  added  to  the  tax  shall  be  col- 
lected at  the  same  time  and  in  the  same  manner  as  the  tax 
unless  the  neglect  or  falsity  is  discovered  after  the  tax  has 
been  paid,  in  which  case  the  amount  so  added  shall  be  col- 
lected in  the  same  manner  as  the  tax;  and  the  list  or  return 
so  made  and  subscribed  by  such  collector  or  deputy  collec- 

50 


THE     FEDERAL     INCOME     TAX     LAW 

tor  shall  be  held  prima  facie  good  and  sufficient  for  all 
legal  purposes." 

J.  That  it  shall  be  the  duty  of  every  collector  of  internal 
revenue,  to  whom  any  payment  of  any  taxes  other  than 
the  tax  represented  by  an  adhesive  stamp  or  other  en- 
graved stamp  is  made  under  the  provisions  of  this  section, 
to  give  to  the  person  making  such  payment  a  full  written 
or  printed  receipt,  expressing  the  amount  paid  and  the  par- 
ticular account  for  which  such  payment  was  made;  and 
whenever  such  payment  is  made  such  collector  shall,  if 
required,  give  a  separate  receipt  for  each  tax  paid  by  any 
debtor,  on  account  of  payments  made  to  or  to  be  made  by 
him  to  separate  creditors  in  such  form  that  such  debtor 
can  conveniently  produce  the  same  separately  to  his  sev- 
eral creditors  in  satisfaction  of  their  respective  demands 
to  the  amounts  specified  in  such  receipts;  and  such  receipts 
shall  be  sufficient  evidence  in  favor  of  such  debtor  to 
justify  him  in  withholding  the  amount  therein  expressed 
from  his  next  payment  to  his  creditor;  but  such  creditor 
may,  upon  giving  to  his  debtor  a  full  written  receipt,  ac- 
knowledging the  payment  to  him  of  whatever  sum  may  be 
actually  paid,  and  accepting  the  amount  of  tax  paid  as 
aforesaid  (specifying  the  same)  as  a  further  satisfaction 
of  the  debt  to  that  amount,  require  the  surrender  to  him  of 
such  collector's  receipt. 

K.  That  jurisdiction  is  hereby  conferred  upon  the  dis- 
trict courts  of  the  United  States  for  the  district  within 
which  any  person  summoned  under  this  section  to  appear 
to  testify  or  to  produce  books  shall  reside,  to  compel  such 
attendance,  production  of  books,  and  testimony  by  appro- 
priate process. 

L.  That  all  administrative,  special,  and  general  provi- 
sions of  law,  including  the  laws  in  relation  to  the  assess- 
ment, remission,  collection,  and  refund  of  internal  revenue 
taxes  not  heretofore  specifically  repealed  and  not  inconsis- 
tent with  the  provisions  of  this  section,  are  hereby  extended 
and  made  applicable  to  all  the  provisions  of  this  section 
and  the  tax  herein  imposed. 

M.  That  the  provisions  of  this  section  shall  extend  to 
Porto  Rico  and  the  Philippine  Islands:  Provided,  That  the 

51 


ANALYSIS  AND   INTERPRETATION    OF 

administration  of  the  law  and  the  collection  of  the  taxes 
imposed  in  Porto  Rico  and  the  Philippine  Islands  shall  be 
by  the  appropriate  internal- revenue  officers  of  those  gov- 
ernments, and  all  revenues  collected  in  Porto  Rico  and  the 
Philippine  Islands  thereunder  shall  accrue  intact  to  the  gen- 
eral governments,  thereof,  respectively:  And  provided  fur- 
ther, That  the  jurisdiction  in  this  section  conferred  upon 
the  district  courts  of  the  United  States  shall,  so  far  as  the 
Philippine  Islands  are  concerned,  be  vested  in  the  courts 
of  the  first  instance  of  said  islands :  And  provided  further, 
That  nothing  in  this  section  shall  be  held  to  exclude  from 
the  computation  of  the  net  income  the  compensation  paid 
any  official  by  the  governments  of  the  District  of  Columbia, 
Porto  Rico  and  the  Philippine  Islands  or  the  political  sub- 
divisions thereof. 

N.  That  for  the  purpose  of  carrying  into  effect  the  pro- 
visions of  Section  II  of  this  Act,  and  to  pay  the  expenses 
of  assessing  and  collecting  the  income  tax  therein  imposed, 
and  to  pay  such  sums  as  the  Commissioner  of  Internal  Rev- 
enue, v^ith  the  approval  of  the  Secretary  of  the  Treasury, 
may  deem  necessary,  for  information,  detection,  and  bring- 
ing to  trial  and  punishment  persons  guilty  of  violating  the 
provisions  of  this  section,  or  conniving  at  the  same,  in 
cases  where  such  expenses  are  not  otherwise  provided  for 
by  law,  there  is  hereby  appropriated  out  of  any  money  in 
the  Treasury  not  otherwise  appropriated  for  the  fiscal  year 
ending  June  thirtieth,  nineteen  hundred  and  fourteen,  the 
sum  of  $800,000,  and  the  Commissioner  of  Internal  Rev- 
enue, with  the  approval  of  the  Secretary  of  the  Treasury, 
is  authorized  to  appoint  and  pay  from  this  appropriation 
all  necessary  officers,  agents,  inspectors,  deputy  collectors, 
clerks,  messengers  and  janitors,  and  to  rent  such  quarters, 
purchase  such  supplies,  equipment,  mechanical  devices,  and 
other  articles  as  may  be  necessary  for  employment  or  use 
in  the  District  of  Columbia  or  any  collection  district  in  the 
United  States,  or  any  of  the  territories  thereof:  Provided, 
That  no  agent  paid  from  this  appropriation  shall  receive 
compensation  at  a  rate  higher  than  that  now  received  by 
traveling  agents  on  accounts  in  the  Internal  Revenue  Serv- 
ice, and  no  inspector  shall  receive  a  compensation  higher 

52 


THE     FEDERAL     INCOME     TAX     LAW 

than  $5  a  day  and  $3  additional  in  lieu  of  subsistence,  and 
no  deputy  collector,  clerk,  messenger,  or  other  employee 
shall  be  paid  at  a  rate  of  compensation  higher  than  the  rate 
now  being  paid  for  the  same  or  similar  work  in  the  Internal 
Revenue  Service. 

In  the  office  of  the  Commissioner  of  Internal  Revenue 
at  Washington,  District  of  Columbia,  there  shall  be  ap- 
pointed by  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  one  additional 
deputy  commissioner,  at  a  salary  of  $4,000  per  annum; 
two  heads  of  divisions,  whose  compensation  shall  not  ex- 
ceed $2,500  per  annum;  and  such  other  clerks,  messengers, 
and  employees,  and  to  rent  such  quarters  and  to  purchase 
such  supplies  as  may  be  necessary:  Provided,  That  for  a 
period  of  two  years  from  and  after  the  passage  of  this 
Act  the  force  of  agents,  deputy  collectors,  inspectors,  and 
other  employees  not  including  the  clerical  force  below  the 
grade  of  chief  of  division  employed  in  the  Bureau  of  In- 
ternal Revenue  in  the  city  of  Washington,  District  of  Co- 
lumbia, authorized  by  this  section  of  this  Act  shall  be  ap- 
pointed by  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  under  such 
rules  and  regulations  as  may  be  fixed  by  the  Secretary  of 
the  Treasury  to  insure  faithful  and  competent  service,  and 
with  such  compensation  as  the  Commissioner  of  Internal 
Revenue  may  fix,  with  the  approval  of  the  Secretary  of  the 
Treasury,  within  the  limitations  herein  prescribed:  Pro- 
vided further,  That  the  force  authorized  to  carry  out  the 
provisions  of  Section  II  of  this  Act,  when  not  employed  as 
herein  provided,  shall  be  employed  on  general  internal-rev- 
enue work. 

Section  IV. 

l^ar.  S.  That,  except  as  hereinafter  provided,  sections 
one  to  forty- two,  both  inclusive,  of  an  Act  entitled  "An 
Act  to  provide  revenue,  equalize  duties,  and  encourage  the 
industries  of  the  United  States,  and  for  other  purposes," 
approved  August  fifth,  nineteen  hundred  and  nine,  and  all 
Acts  and  parts  of  Acts  inconsistent  with  the  provisions  of 

53 


ANALYSIS  AND   INTERPRETATION   OF 

this  Act,  are  hereby  repealed:  Provided,  That  nothing  in 
this  Act  shall  be  construed  to  permit  any  oaths  to  be  de- 
manded or  fees  to  be  charged  except  as  provided  in  this 
Act  or  in  section  twenty-eight  hundred  and  sixty-two  of 
the  Revised  Statutes  of  the  United  States,  nor  to  repeal  or 
in  any  manner  affect  the  following  numbered  sections  of 
the  aforesaid  Act  approved  August  fifth,  nineteen  hundred 
and  nine,  viz :  Subsection  twenty-nine  of  section  twenty- 
eight  and  subsequent  laws  and  amendments  relating  to  the 
establishment  and  continuance  of  a  Customs  Court,  sub- 
section thirty  of  section  twenty-eight,  providing  for  addi- 
tional attorneys,  subsection  twelve  of  section  twenty-eight 
and  subsequent  provisions  establishing  a  Board  of  General 
Appraisers  of  merchandise,  sections  thirty,  thirty-one, 
thirty-two,  thirty-three,  and  thirty-five,  imposing  an  inter- 
nal revenue  tax  upon  tobacco,  section  thirty-six,  providing 
for  a  tonnage  duty,  section  thirty-nine,  authorizing  the 
Secretary  of  the  Treasury  to  borrow  on  the  credit  of  the 
United  States  to  defray  expenditures  on  account  of  the 
Panama  Canal,  section  forty,  authorizing  the  Secretary  of 
the  Treasury  to  borrow  to  meet  public  expenditures:  Pro- 
vided further,  That  all  excise  taxes  upon  corporations  im- 
posed for  the  year  ending  December  thirty-first,  nineteen 
hundred  and  twelve,  shall  be  returned,  assessed,  and  col- 
lected in  the  same  manner,  and  under  the  same  provisions, 
liens,  and  penalties  as  if  section  thirty-eight  continued  in 
full  force  and  effect :  And  provided  further.  That  a  special 
excise  tax  with  respect  to  the  carrying  on  or  doing  of  busi- 
ness, equivalent  to  1  per  centum  upon  their  entire  net  in- 
come, shall  be  levied,  assessed,  and  collected  upon  corpora- 
tions, joint  stock  companies  or  associations,  and  insurance 
companies,  of  the  character  described  in  section  thirty- 
eight  of  the  Act  of  August  fifth,  nineteen  hundred  and 
nine,  for  the  period  from  January  first  to  February  twenty- 
eighth,  nineteen  hundred  and  thirteen,  both  dates  inclusive, 
which  said  tax  shall  be  computed  upon  one-sixth  of  the 
entire  net  income  of  said  corporations,  joint  stock  com- 
panies or  associations,  and  insurance  companies,  for  said 
year,  said  net  income  to  be  ascertained  in  accordance  with 
the  provisions  of  subsection  G  of  section  two  of  this  Act: 

54 


THE     FEDERAL     INCOME     TAX     LAW 

Provided  further,  That  the  provisions  of  said  section  thirty- 
eight  of  the  Act  of  August  fifth,  nineteen  hundred  and 
nine,  relative  to  the  collection  of  the  tax  therein  imposed 
shall  remain  in  force  for  the  collection  of  the  excise  tax 
herein  provided,  but  for  the  year  nineteen  hundred  and 
thirteen  it  shall  not  be  necessary  to  make  more  than  one 
return  and  assessment  for  all  the  taxes  imposed  herein 
upon  said  corporations,  joint  stock  companies  or  associa- 
tions, and  insurance  companies,  either  by  way  of  income 
or  excise,  which  return  and  assessment  shall  be  made  at 
the  times  and  in  the  manner  provided  in  this  Act;  but  the 
repeal  of  existing  laws  or  modifications  thereof  embraced 
in  this  Act  shall  not  affect  any  act  done,  or  any  right  accru- 
ing or  accrued,  or  any  suit  or  proceeding  had  or  com- 
menced in  any  civil  case  before  the  said  repeal  or  modifi- 
cation; but  all  rights  and  liabiHties  under  said  laws  shall 
continue  and  may  be  enforced  in  the  same  manner  as  if 
said  repeal  or  modifications  had  not  been  made.  Any  of- 
fenses committed  and  all  penalties  or  forfeitures  or  liabili- 
ties incurred  prior  to  the  passage  of  thi%  Act  under  any 
statute  embraced  in  or  changed,  modified,  or  repealed  by 
this  Act  may  be  prosecuted  or  punished  in  the  same  manner 
and  with  the  same  effect  as  if  this  Act  had  not  been  passed. 
No  Acts  of  limitation  now  in  force,  whether  applicable  to 
civil  causes  or  proceedings  or  to  the  prosecution  of  offenses 
or  for  the  recovery  of  penalties  or  forfeitures  embraced  in 
or  modified,  changed,  or  repealed  by  this  Act  shall  be  af- 
fected thereby  so  far  as  they  affect  any  suits,  proceedings, 
or  prosecutions,  whether  civil  or  criminal,  for  causes  aris- 
ing or  acts  done  or  committed  prior  to  the  passage  of  this 
Act,  which  may  be  commenced  and  prosecuted  within  the 
same  time  and  with  the  same  effect  as  if  this  Act  had  not 
been  passed. 


55 


THE     FEDERAL     INCOME     TAX     LAW 


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57 


ANALYSIS  AND    INTERPRETATION   OF 


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58 


THE     FEDERAL     INCOME     TAX     LAW 


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59 


ANALYSIS  AND   INTERPRETATION   OF 


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60 


THE     FEDERAL     INCOME     TAX     LAW 


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61 


ANALYSIS  AND   INTERPRETATION   OF 


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62 


THE     FEDERAL     INCOME     TAX     LAW 

(T.  D.  1892.) 
Income  tax. 

Interest  upon  obligations  of  the  United  States  or  its  possessions,  or  of 
any  State,  county,  city,  or  any  other  political  subdivision  thereof,  is 
not  subject  to  income  tax. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  November  6,  ipij. 

To  collectors  of  internal  revenue: 

It  has  been  called  to  the  attention  of  this  office  that 
banks  in  certain  sections  are  refusing  to  pay  coupons  for 
interest  on  bonds  of  States,  counties,  cities,  or  other  po- 
litical subdivisions  of  the  United  States,  when  such  cou- 
pons are  not  accompanied  by  certificates  of  ownership, 
without  deducting  the  normal  income  tax  of  1  per  cent, 
which  the  law  and  the  regulations  of  this  department  re- 
quire shall  be  deducted  at  the  source  in  paying  the  interest 
on  bonds  of  corporations,  joint-stock  companies  or  associa- 
tions, and  insurance  companies. 

Please  inform  all  parties  interested,  giving  the  informa- 
tion wide  publicity,  that  the  income  derived  from  the  in- 
terest upon  the  obligations  of  a  State,  county,  city,  or  any 
other  political  subdivision  thereof,  and  upon  the  obliga- 
tions of  the  United  States  or  its  possessions,  is  not  sub- 
ject to  the  income  tax,  and  a  certificate  of  ownership  in 
connection  with  the  coupons  or  registered  interest  orders 
for  such  interest  will  not  be  required. 

The  interest  coupons  should  clearly  show  on  their  face 
whether  they  are  issued  by  the  United  States  or  any  po- 
litical subdivision  thereof.  If,  however,  they  do  not 
clearly  show  this,  then,  of  course,  an  ownership  certificate 
should  be  required. 

W.  H.  OsBORN,  Commissioner. 


63 


ANALYSIS  AND   INTERPRETATION    OF 


(T.  D.  1893.) 
Income  tax. 

Income  tax  on  the  interest  on  bank  deposits  and  bank  certificates  of 
deposit  not  to  be  withheld  at  the  source. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  November  6,  1913. 

To  collectors  of  internal  revenue: 

Banks,  bankers,  trust  companies,  and  other  banking  in- 
stitutions receiving  deposits  of  money  are  not  required 
under  the  Treasury  regulations  (part  2),  approved  October 
31,  1913,  to  withhold  at  the  source  the  normal  income  tax 
of  1  per  cent  on  the  interest  paid  or  accrued  or  accruing 
to  depositors,  whether  on  open  accounts  or  on  certificates 
of  deposit;  but  all  such  interest,  whether  paid  or  accrued 
and  not  paid,  must  be  included  in  his  tax  return  by  the 
person  or  persons  entitled  to  receive  such  interest,  whether 
on  open  account  or  on  the  certificate  of  deposit. 

W.  H.  OsborNj  Commissioner. 

Approved : 

W.  G.  McAdoo, 

Secretary  of  the  Treasury. 


64 


THE     FEDERAL     INCOME     TAX     LAW 


(T.  D.  1894.) 
Income  tax. 

Income-tax  ruling  as  to  how  and  by  whom  certificates  of  ownership 
may  be  signed  in  cases  where  bonds  of  corporations,  joint-stock 
companies  or  associations,  and  insurance  companies  are  owned  by 
nonresident  aliens. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  November  12,  IQIS- 

To  collectors  of  internal  revenue: 

Coupons  (or  orders  for  registered  interest)  payable  in 
the  United  States,  representing  the  interest  on  bonds  owned 
by  nonresident  aHens,  must  he  accompanied  by  the  pre- 
scribed certificate,  Form  1004,  as  per  Treasury  regulations 
of  October  25,  1913;  but  this  certificate  may  be  signed 
either  by  the  owner  himself  (herself  or  themselves)  or  in 
behalf  of  the  owner  by  a  reputable  bank  or  bankers,  or 
other  responsible  collecting  agency,  certifying  to  the  owner- 
ship of  the  bonds  and  giving  the  name  and  address  of  the 
bona  fide  nonresident  and  alien  owners,  and  when  such 
certificate  is  thus  attached  the  normal  tax  of  1  per  cent  on 
such  coupons  or  interest  orders  need  not  be  withheld  at 
the  source  by  the  debtor  or  collecting  agency. 

W.  H.  OsBORN,  Commissioner, 

x\pproved : 

W.  G.  McAdoo, 

Secretary  of  the  Treasury. 


65 


ANALYSIS  AND   INTERPRETATION    OF 


(TREASURY  DECISION  1926.) 
Income  tax. 

Regulations  permitting  text  of  certificates  of  ownership,  1004,  1014  and 
1016,  used  by  non-resident  foreign  individuals,  partnerships  and 
organizations,  to  be  printed  in  foreign  language  directly  under  the 
English  text  of  said  certificates. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  December  30,  1913. 

Certificates  of  ownership  required  to  be  filed  with  in- 
terest coupons  or  orders  for  registered  interest  by  non-resi- 
dent foreigners  on  Form  1004,  by  foreign  partnerships  on 
Form  1014,  and  by  foreign  organizations  on  Form  1016 
shall  be  printed,  as  prescribed  by  regulations,  in  the  Eng- 
lish language,  and  directly  under  each  line  of  the  English 
text,  on  each  of  the  above  mentioned  certificates,  there  may 
be  printed  the  text  of  said  certificate  in  a  foreign  language. 

In  executing  these  certificates,  however,  all  blanks  to  be 
filled  in,  with  amounts,  shall  be  filled  in  using  United  States 
dollar  values. 

These  certificates  shall  be  of  the  same  size  as  prescribed 
by  regulations  for  all  certificates  of  ownership. 

W.  H.  OSBORN, 

Commissioner. 

Approved : 

W.  G.  McAdoo, 
Secretary. 


66 


THE     FEDERAL     INCOME     TAX     LAW 


(TREASURY  DECISION  1928.) 
Income  tax. 

Regulation  prescribing  additional  forms  on  which  to  make  returns  of 
annual  net  income  for  the  income  tax. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  lantiary  2,  1914. 

The  forms  numbered  and  described  below,  in  addition 
to  those  previously  approved,  are  prescribed  by  this  de- 
partment for  the  purposes  indicated  in  connection  with  the 
administration  of  the  Federal  income-tax  law  (sec.  2  of 
the  act  of  Oct.  3,  1913): 

Forms  1030,  1031,  1032,  1033,  1034,  and  1035  are  to 
be  used  by  corporations  in  making  their  returns  of  annual 
net  income,  as  follows:  No.  1030  by  insurance  companies; 
No.  1031  by  banks  and  other  financial  institutions  (class 
A) ;  No.  1032  by  public  service  corporations  (class  B) ; 
No.  1033  by  manufacturing  corporations  (class  C) ;  No. 
1034  by  mercantile  corporations  (class  D)  ;  No.  1035  by 
miscellaneous  corporations  (class  E). 

Form  1040  is  to  be  used  by  individuals,  or  their  duly 
authorized  agents,  in  making  the  personal  return  of  annual 
net  income. 

Form  1041  is  to  be  used  by  fiduciaries  in  making  returns 
of  annual  net  income  in  behalf  of  their  beneficiaries  and 
as  withholding  agents. 

Form  1042  is  the  annual  list  return  of  withholding 
agents  of  taxes  withheld  by  them  on  income  other  than 
that  derived  from  corporate  obligations. 

Form  1043  is  a  monthly  list  return  of  taxes  withheld  on 
foreign  income  by  licensed  banks  or  collecting  agents. 

Form  1043a  is  the  annual  list  return  to  be  made  by 
licensed  banks  and  collecting  agents  of  taxes  withheld  by 
them  during  the  year  on  foreign  items. 

67 


ANALYSIS  AND   INTERPRETATION   OF 

Form  1044  is  a  monthly  list  return  of  taxes  withheld  by 
the  first  bank  or  collecting  agency  receiving  coupons  or  in- 
terest orders  not  accompanied  by  certificates  of  owners. 

Form  1044a  is  the  annual  list  return  of  taxes  withheld 
during  the  year  by  the  first  bank  or  collecting  agency  re- 
ceiving coupons  or  interest  orders  not  accompanied  by  cer- 
tificates of  owners. 

Form  2Za  will  be  used  by  collectors  in  listing,  for  assess- 
ment, the  corporations  showing  net  income  upon  which  the 
tax  is  to  be  computed,  this  form  to  be  prepared  in  dupli- 
cate. 

Form  23&  will  be  used  by  collectors  in  listing,  for  assess- 
ment, withholding  agents,  fiduciaries,  etc.,  and  individuals 
who  return  a  taxable  income. 

W.   H.   OSBORN, 

Commissioner  of  Internal  Revenue. 

Approved : 

W.  G.  McAdoo, 

Secretary  of  the  Treasury. 


68 


THE     FEDERAL     INCOME     TAX     LAW 


(TREASURY  DECISION  1929.) 
Income  tax. 

Supplemental  regulations  prescribing  form  of  certificate  to  be  attached 
to  interest  coupons  in  cases  where  the  collecting  agent's  certificate 
is  substituted  for  the  certificate  of  the  owners,  when  said  owners 
are  fiduciaries  not  claiming  exemption  at  source. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  January  j,  1914- 

Subject  to  the  provisions  of  the  regulations  in  T.  D. 
1903,  dated  November  28,  1913,  collecting  agents  may 
substitute  Form  1019a,  properly  filled  in  and  numbered, 
for  the  certificate  of  the  owner  on  Form  1019. 

When  collecting  agents  substitute  their  own  certificates 
in  lieu  of  owner's  certificate  on  Form  1019,  said  substitute 
certificate  shall  be  in  substantially  the  following  form: 


69 


ANALYSIS  AND   INTERPRETATION   OF 


(Form  1019a) 

Form  of  certificate  to  be  attached  to  interest  coupons  in  cases  where 
the  collecting  agent's  certificate  is  substituted  for  the  certificate  of 
the  owners. 
(IV hen  owners  are  fiduciaries.) 

(The  owner's  certificate,  of  which  the  following  certificate  is  the 
counterpart,  and  bears  the  same  number  as  this  certificate,  will  be  sent 
by  the  collecting  agent  direct  to  the  Commissioner  of  Internal  Revenue 
at  Washington,  as  prescribed  by  regulations.) 

No- 

I   (we)    ,  do  solemnly  declare  that  the 

(Name  of  collecting  agent.), 

owner  of  $ bonds  of  the , 

(Name  of  debtor  organization.) 
from   which   were    detached   the   accompanying   interest   coupons   due 

,  191 . .,  amounting  to  $ ,  has  filed 

(Maturity.) 
with  me  (us)   a  duly  executed  certificate  filled  up  in  accordance  with 
Treasury  Regulations  of  December  8,  1913,  Form  1019,  which  certificate 

has  been  endorsed  by  me  (us)  as  follows:  "Owner's  certificate  No 

,   191...,"   that   said 

(Name  of  collecting  agency.)  (Date.) 

certificate  is  executed  by  a  fiduciary,  and  that  the  fiduciary,  acting  for 
and  in  the  capacity  as  stated  therein,  did  not  claim  any  exemption  from 
having  the  normal  tax  of  1  per  cent  withheld  from  said  income  by 
the  debtor  at  the  source;  and  I  (we)  do  hereby  promise  and  pledge 
myself  (ourselves)  to  forward  the  above-described  certificate  executed 

by  the  owners  as  stated  and  dated ,  191 ... ,  to 

the  Commissioner  of  Internal  Revenue,  at  Washington,  D.  C,  not 
later  than  the  20th  day  of  next  month,  in  accordance  with  Treasury 
Regulations. 

Signature  of  collecting  agent : 

Date : ,  191 .. .  Address  : 

W.  H.  OSBORN, 

Commissioner  of  Internal  Revenue. 

Approved  : 

W.  G.  McAdoo, 

Secretary  of  the  Treasury. 


70 


THE     FEDERAL     INCOME     TAX     LAW 

(TREASURY  DECISION  1934.) 
Income  tax. 

Individuals  whose  net  income  from  March  1  to  December  31,  1913,  both 
dates  inclusive,  is  $2,500  or  more  must  make  returns  of  annual  net 
income  for  1913. 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  January  i6,  1914. 

Section  2,  Act  of  October  3,  1913,  provides  that  on  or 
before  the  first  day  of  March,  1914,  and  the  first  day  of 
March  in  each  year  thereafter,  a  true  and  accurate  return, 
under  oath  or  affirmation,  shall  be  made  to  the  Collector  of 
Internal  Revenue  by  each  person  of  lawful  age,  who  may 
be  subject  to  the  tax  imposed  by  this  section,  who  has  a 
net  income  of  $3,000  or  over  for  the  taxable  year. 

It  is  further  provided  that  for  the  year  ending  December 
31,  1913,  the  tax  shall  be  computed  on  the  net  income  ac- 
cruing from  March  1  to  December  31,  1913,  both  dates  in- 
clusive, after  deducting  five-sixths  only  of  the  specific  ex- 
emption and  deductions  allowable  for  an  entire  taxable 
year. 

Since  the  return  of  annual  net  income  for  the  year  1913, 
as  appHed  to  individuals,  is  for  but  five-sixths  of  the  cal- 
endar year,  and  as  the  law  provides  that  returns  shall  be 
made  on  the  basis  of  five-sixths  of  the  year,  it  is  held  that 
individuals  whose  net  income  is  $2,500  or  more  for  the  ten 
months  constituting  the  taxable  period  of  1913,  shall  make 
returns  of  annual  net  income,  in  accordance  with  the  gen- 
eral provisions  of  the  law,  covering  the  1913  taxable  period. 

W.  H.  OSBORN, 

Commissioner. 
Approved : 

W.  G.  McAdoo, 

Secretary. 


71 


ANALYSIS  AND   INTERPRETATION    OF 

(TREASURY  DECISION  1937.) 
INCOME  TAX 

Corporations  are  not  permitted  to  deduct  from  gross  or  net  income 
for  the  year  1913  any  portion  of  specific  exemption  authorized 
under  corporation  tax  law  (Section  38,  Act  of  August  5,  1909.) 

Treasury  Department, 
Ofpice  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  January  26,  1914. 

Section  2  of  the  Act  approved  October  3,  1913,  known 
as  the  Federal  Income  Tax  Law,  provides  that  all  corpo- 
rations, joint  stock  companies  and  all  insurance  companies, 
except  those  specifically  enumerated  as  exempt,  shall  be 
subject  to  the  normal  tax  imposed  upon  individuals — such 
tax  to  be  levied,  assessed  and  paid  annually  upon  the  en- 
tire net  income  arising  or  accruing  from  all  sources  during 
the  preceding  calendar  year. 

The  provisions  of  this  act  apply  to  corporations  which 
have  or  may  have  income  arising  or  accruing  on  and  after 
March  1,  1913.  For  the  purpose  of  covering  the  liability 
of  corporations  to  special  excise  tax  for  the  months  of 
January  and  February,  1913,  the  provisions  of  the  corpo- 
ration tax  law  (Section  38,  Act  of  August  5,  1909)  were 
extended,  and  in  subsection  S  of  the  income  tax  law  it  is 
provided  that  the  net  income  for  these  two  months  shall 
be  ascertained  in  accordance  with  the  provisions  of  sub- 
section G  of  Section  2  of  the  Act  of  October  3,  1913, — 
that  is,  in  the  same  manner  as  the  net  income  for  the  re- 
maining ten  months  of  the  year  is  ascertained. 

In  the  subsection  G  just  cited  all  items  or  charges  against 
income,  which  constitute  allowable  deductions  from  gross 
income,  are  specifically  set  out.  No  provision,  either  ex- 
press or  implied,  is  made  in  this  subsection  or  elsewhere  in 
the  act  for  the  allowance  of  all  or  any  portion  of  the  spe- 
cific exemption  ($5,000)  allowed  under  the  corporation 
tax  law.     As  applied  to  the  months  of  January  and  Feb- 

72 


THE     FEDERAL     INCOME     TAX     LAW 

ruary,  1913,  the  income  tax  law  in  effect  amends  the  cor- 
poration tax  law  by  eliminating  the  specific  exemption  pre- 
viously allowed,  and  provides  that  the  tax  for  that  period 
shall  be  measured  by  the  net  income  ascertained  according 
to  the  rule  set  out  in  subsection  G  of  the  later  act.  (See 
the  2d  proviso  in  subsection  S,  Act  of  October  3,  1913.) 
The  third  proviso  of  subsection  S  also  provides  that  "for 
the  year  1913  it  shall  not  be  necessary  to  make  more  than 
one  return  and  assessment  for  all  taxes  imposed  *  *  * 
by  way  of  income  or  special  excise."  The  net  income  for 
both  kinds  of  taxes  and  for  both  periods  of  the  year  being 
ascertained  in  exactly  the  same  manner,  but  one  return 
covering  the  entire  calendar  year  1913  is  required.  That 
return  will  show  the  entire  net  income  ascertained  in  accord- 
ance with  the  provisions  of  the  income  tax  law,  and  no 
specific  exemption  whatever  being  authorized,  such  net  in- 
come as  returned  for  the  entire  year  will  be  the  amount 
upon  which  the  tax  is  computed. 

RoBT.  Williams,  Jr., 

Acting  Commissioner. 


73 


I      UNiv: 


UNIVERSITV 


YC  23473 


